Question

The president of Ravens, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year’s traditional model income statement be revised, and she received the following report: Division Total Company A B C Sales $ 508,000 $ 196,000 $ 136,000 $ 176,000 Variable expenses 272,000 110,000 68,000 94,000 Contribution margin $ 236,000 $ 86,000 $ 68,000 $ 82,000 Fixed expenses 184,000 58,000 72,000 54,000 Net income (loss) $ 52,000 $ 28,000 $ (4,000 ) $ 28,000 The president was told that the fixed expenses of $184,000 included $100,500 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!"

b. Calculate what the company's net income would be if Division B were closed down.

Answer 1

--Requirement B
Net Income if Division B were closed down = $ 22,500

--Working

A	Total Fixed Expenses allocated to Division B	$72,000
B = 100500 / 3	Common Fixed Expense allocated to 'B'	$33,500
C = A - B	Traceable Fixed expense of Div B that will be avoided	$38,500
D	Contribution margin of Division B that would be lost	($68,000)
E = C+D	Increase (Decrease) in Net Income	($29,500)
F	Net Income when all 3 divisions were operative	$52,000
G = E + F	Net Income if Div B SHUTS DOWN	$22,500 = Answer