Question

Cullumber, Inc. operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. “Survival of the fittest, I say!” was his response when the Weak division’s manager, insisted Mark, that his division earned money for the company. Following is the most recent financial analysis for each division:

		Weak			Average		Strong
Sales revenue		$125,100			$451,500		$501,400
Variable expenses		58,700			246,300		309,300
Contribution margin		66,400			205,200		192,100
Direct expenses		37,100			78,200		110,100
Allocated expenses		69,600			69,600		69,600
Operating income		$(40,300)			$57,400		$12,400

(a)

• Your Answer
• Correct Answer

Correct answer iconYour answer is correct.

Prepare a revised income statement showing the segment margin for each division.

		Weak		Average		Strong		Total
select an income statement item                                                                      Segment marginVariable expenseSalesDirect costsAllocated expenseOperating incomeContribution margin		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
select an income statement item                                                                      Direct expenseSalesVariable expenseOperating incomeSegment marginContribution marginAllocated expense		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
select a summarizing line for the first part                                                                      Variable expenseContribution marginAllocated expenseOperating incomeDirect expenseSalesSegment margin		enter a total amount for the first part		enter a total amount for the first part		enter a total amount for the first part		enter a total amount for the first part
select an income statement item                                                                      Allocated expenseSegment marginSalesDirect expenseContribution marginOperating incomeVariable expense		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
select a summarizing line for the second part                                                                      Variable expenseContribution marginDirect expenseSegment marginOperating incomeSalesAllocated expense		$enter a total amount for the second part		$enter a total amount for the second part		$enter a total amount for the second part		enter a total amount for the second part
select an income statement item                                                                      Operating incomeContribution marginAllocated expenseSegment marginSalesVariable expenseDirect expense								enter a dollar amount
select a closing name for this statement                                                                      Variable expenseSalesDirect expenseOperating incomeContribution marginSegment marginAllocated expense								$enter a total amount for this statement

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Attempts: 3 of 3 used

(b)

• Your Answer
• Correct Answer

Correct answer iconYour answer is correct.

By how much would total income change if the Weak division were dropped?

Total income will select an option                                                                      increasedecrease by $enter a dollar amount  .

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Solution

  

Attempts: 3 of 3 used

(c)

Based on the way allocated expenses are divided among the divisions, what do you think will happen to the Average division if the company continues to prepare financial statements in this way, assuming Weak was dropped?

If Weak is dropped, then Average will report allocated expenses of $enter a dollar amount  , resulting in an select an option                                                                      operating incomeoperating loss of $enter a dollar amount  for the division.

Answer 1

Answer:

If Weak is dropped, allocated expenses will be allocated in between Average and Strong

Allocation = $ 69,600 x 3 / 2   =   $ 104,400 will be allocated

Operating Income     = Contribution margin (-) Direct Expenses (-) Allocated expenses     = $ 205,200 (-) $ 78,200 (-) $ 104,400     =   $ 22,600

If Weak is dropped, then $ 104,400 will be allocated to Average

resulting $ 22,600 loss for the division as Currently reported