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 | $260,000 |
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 | 250,000 |
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) | $ |
Which product has the highest product margin?
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.
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