Question

            Trent Weaver was reviewing the latest income statement for Taryn Enterprises. For the second year in a row, the Collectibles division was showing a negative segment margin, an943,00d Trent thought it was time to close the division to increase the company’s operating income. The income statement that he examined follows.   

	Promotions Division		Collectibles Division		Total
Sales revenue	$5,300,000		$2,860,000		$8,160,000
Less variable expenses	3,650,000		1,645,000		5,295,000
Contribution margin	1,650,000		1,215,000		2,865,000
Less traceable fixed expenses	943,000		1,275,000		2,218,000
Segment margin	$707,000		($60,000)		647,000
Common fixed costs					555,000
Net operating income					$92,00

  

            When Trent broke the news, Taylor Tatum, manager of the Collectibles division, was upset. Taylor thought that Trent could be making a snap judgment, and suggested that he look at the division’s detailed operating results. The Collectibles division is composed of two groups, Sports Memorabilia and Coins and Stamps. Sports Memorabilia accounts for 75% of the division’s sales and contribution margin; Coins and Stamps accounts for the other 25%. Sports Memorabilia’s traceable fixed costs are $450,000; Coins and Stamps, $350,000.   

Required:

1.          Prepare a segment margin income statement for the Collectibles division that shows the segment margin of each group.

2.          Should Trent Weaver close the Collectibles Division? Why or why not?                                                                                                                                    

Answer 1

a.

Segment Margin Income Statement
	Collectibles Division
	Sports Memorabilia	Coins and Stamps	Total
Sales revenue	2145000	715000	2860000
Less variable expenses	1233750	411250	1645000
Contribution margin	911250	303750	1215000
Less traceable fixed expenses	450000	350000	800000
Segment margin	461250	-46250	415000
Common fixed costs			475000
Net operating income (loss)			-60000

b. No.

Trent Weaver should not close the Collectibles Division since it would lose on the segment margin generated by the Sports Memorabilia group which would reduce the overall profits of the company.