Question

Please show what formula you will use. Thank you

Hamilton, Inc. has two divisions, Parker and Blaine. Following is the income statement for the previous year:

	Parker	Blaine
Sales	$1,200,000	$800,000
Variable Costs	600,000	450,000
Contribution Margin	$600,000	$350,000
Fixed Costs	450,000	390,000
Net Operating Income	$150,000	($40,000)

Of the total fixed costs, $600,000 are common fixed costs that are allocated equally between the divisions. What would Hamilton's net operating income be if Blaine were dropped?

Selected Answer:	($240,000)
Answers:	($240,000)
	($150,000)
	$110,000
	$150,000

Answer 1

Currently the common fixed costs are allocated equially between parker and blain. which would mean that the Fixed costs shown in the Income statement includes $600,000/2 = $300,000.

Hence the non-common fixed costs are:

Parker = Total fixed costs - Common fixed costs = $450,000 - $300,000 = $150,000

Blaine = Total fixed costs - Common fixed costs = 390,000 - $300,000 = $90,000

As a result if Blaine was dropped, the net income for Parker would be computed as

Sales - Variable Cost - Non-Common Fixed Cost - Entire Common Fixed Cost

=1,200,000 - 600,000 - 150,000 - 600,000 = -150,000