Question

Segmented Income Statements, Adding and Dropping Product Lines

Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows:

Sales		$4,590,000
Less: Variable expenses		3,953,450
Contribution margin		$636,550
Less: Direct fixed expenses		675,000
Divisional margin		$(38,450)
Less: Common fixed expenses (allocated)		200,000
Divisional profit (loss)		$(238,450)

Upon arriving at the division, Dantrell requested the following data on the division’s three products:

		Product A		Product B		Product C
Sales (units)		12,000		14,500		10,000
Unit selling price		$150		$120		$70
Unit variable cost		$100		$83		$107
Direct fixed costs		$100,000		$430,000		$250,000

He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows:

Unit selling price		$80
Unit variable cost		30
Direct fixed costs		240,000

Required:

1. Prepare segmented income statements for Products A, B, and C.

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	B	C	Total
Sales	$	$	$	$
Less: Variable expenses
Contribution margin	$	$	$	$
Less: Direct fixed expenses
Product margin	$	$	$	$
Less: Common fixed expenses
Operating income (loss)				$

Feedback

Do not forget common fixed costs are added at the Division level.

Which product has the highest product margin?
A

Feedback

Look at profit margin for each product.

2. Assume that Dantrell decides to produce products A and D for the coming year. Prepare the segmented income statements for these two products.

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	D	Total
Sales	$	$	$
Less: Variable expenses
Contribution margin	$	$	$
Less: Direct fixed expenses
Product margin	$	$	$
Less: Common fixed expenses
Operating income			$

By how much will profits improve given the combination assumed above? Enter your answer in dollars.
$___________

Answer 1

1.

Segmented Income Statement
Products
	A	B	C	Total
Sales	$     18,00,000	$     17,40,000	$       7,00,000	$       42,40,000
Less: Variable expenses	$     12,00,000	$     12,03,500	$     10,70,000	$       34,73,500
Contribution margin	$       6,00,000	$       5,36,500	$     -3,70,000	$         7,66,500
Less: Direct fixed expenses	$       1,00,000	$       4,30,000	$       2,50,000	$         7,80,000
Product margin	$       5,00,000	$       1,06,500	$     -6,20,000	$           -13,500
Less: Common fixed expenses				$         2,00,000
Operating income (loss)				$        -2,13,500

Total is not matching with income statement given.

2.

Segmented Income Statement
Products
	A	D	Total
Sales	$     18,00,000	$     16,00,000	$     34,00,000
Less: Variable expenses	$     12,00,000	$       6,00,000	$     18,00,000
Contribution margin	$       6,00,000	$     10,00,000	$     16,00,000
Less: Direct fixed expenses	$       1,00,000	$       2,40,000	$       3,40,000
Product margin	$       5,00,000	$       7,60,000	$     12,60,000
Less: Common fixed expenses			$       2,00,000
Operating income (loss)			$     10,60,000

Profits improvement = $1060000+213500 = $1273500