Question

Braxton Company has three divisions: Golf, Baseball, and Soccer.

Sales in each division last year were as follows: Golf $80,000; Baseball $100,000; Soccer $60,000.

The segment margin amounts for each division last year were as follows: Golf $25,000; Baseball $40,000; Soccer ($5,000).

Company management is considering dropping the Soccer segment because it generated a loss.

Which of the following statements is true?

Multiple Choice

• Braxton Company will be financially worse off by $60,000 if it drops the Soccer segment, assuming sales and expenses in the Golf and Baseball segments will not be affected by this move.

• Braxton Company will be financially better off by $5,000 if it drops the Soccer segment, assuming sales and expenses in the Golf and Baseball segments will not be affected by this move.

• Braxton Company will be $5,000 worse off if it drops the Soccer segment, assuming sales and expenses in the Golf and Baseball segments will not be affected by this move.

• Braxton Company will be financially better off by $60,000 if it drops the Soccer segment, assuming sales and expenses in the Golf and Baseball segments will not be affected by this move.

Answer 1

Current total margin of Braxton company is $60000 (25000+40000-5000). If it drops the soccer segment all sales revenue and variable costs related to soccer segment will be eliminated. That is 5000 loss from total segment margin can be avoided. Then the new margin of Braxton Company will be $65000 (25000+40000). That is Company margin will increase by $5000.

Therefore, the Answer is,

Braxton Company will be financially better off by $5000 if it drops the soccer segment, assuming sales and expenses in the Golf and Baseball segments will not be affected by this move.

Sales also will be eliminated along with costs. Se can’t say that position will better off or get into a worse situation by $60000 by this move. Segment loss can be eliminated. So company will not be financially worse off by $5000.