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		$	424,000			$	168,000			$	108,000			$	148,000
Variable expenses			243,000				101,000				62,000				80,000
Contribution margin		$	181,000			$	67,000			$	46,000			$	68,000
Fixed expenses			133,000				44,000				49,000				40,000
Net income (loss)		$	48,000			$	23,000			$	(3,000	)		$	28,000

The president was told that the fixed expenses of $133,000 included $93,000 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

Corporate general fixed expenses = 93,000 evenly allocated to all divisions

1.      Allocation of General fixed expenses to divisions before division B elimination

Corporate general fixed

Corporate general fixed expenses allocated to Division C = $31,000

expenses allocated to Division A = $31,000

Corporate general fixed expenses allocated to Division B = $31,000

2. Allocation of General fixed expenses to divisions after division B elimination

Corporate general fixed expenses allocated to Division A = $46,500

Corporate general fixed expenses allocated to Division C = $46,500