Question

# The president of Ravens, Inc., attended a seminar about the contribution margin model and returned to...

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 \$ 448,000 \$ 176,000 \$ 116,000 \$ 156,000 Variable expenses 258,000 110,000 64,000 84,000 Contribution margin \$ 190,000 \$ 66,000 \$ 52,000 \$ 72,000 Fixed expenses 148,000 48,000 56,000 44,000 Net income (loss) \$ 42,000 \$ 18,000 \$ (4,000 ) \$ 28,000

The president was told that the fixed expenses of \$148,000 included \$85,500 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!"

Required:

a. Evaluate the president's remark.

 The president's remark ignores the misleading result of arbitrarily allocated fixed expenses. The president's remark ignores the misleading result of arbitrarily allocated variable expenses.

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

c. What is the policy statement related to the allocation of fixed expenses.

 Never arbitrarily allocate fixed expenses. Never arbitrarily allocate variable expenses.

a. The president's remark ignores the misleading result of arbitrarily allocated fixed expenses.

b.

 Division Total Company A C Sales 332000 176000 156000 Variable expenses 194000 110000 84000 Contribution margin 138000 66000 72000 Fixed expenses 148000 Net income (loss) -10000

If Division B were closed down, the contribution margin earned by Division B would be lost due to which the total net income of the company would be reduced to that extent.

c.  Never arbitrarily allocate fixed expenses.

#### Earn Coins

Coins can be redeemed for fabulous gifts.