URL Services has two divisions: Basic Web Pages and Custom Web Pages. Ricky Vega

Question

URL Services has two divisions: Basic Web Pages and Custom Web Pages. Ricky Vega, manager of Custom Web Pages, wants to find out why Custom Web Pages is not profitable. He has prepared the reports that appear on the next page.
1. How will URL Services be affected if the Custom Web Pages Division is eliminated?
2. How will URL Services be affected if the Design segment of Custom Web Pages is eliminated?
3. What should Ricky Vega do? What additional information would be helpful to him in making thedecision?

How will URL Services be affected if the Custom Webpages Division is eliminated? If the Custom Webpages Division is eliminated: a. URL Services will b. The total segment margin and operating income by c. The revised will be How will URL Services be affected if the Design segment of Custom Webpages is eliminated? If the Design segment of Custom Webpages is eliminated: a. URL Services will b. The total company's segment margin by to c. Custom Webpages' segment margin to This is due to the elimination of the of

Explanation / Answer

Part -1 URL Services affected if the Custom Web pages division eliminated URL Services Segment Income Statement for the year ended Dec 31 Service Revenue 200000 Less Variable Cost Direct Profession labor : Design 32000 Direct Profession labor : Install 30000 Direct Profession labor : Maintenance 15000 77000 Contribution Margin 123000 Less: Direct Fixed Cost Dep.on Computer Equipment 6000 Dep.on Servers 10000 16000 Less: Common Fixed Assets Building Rent 24000 Suppliers 1000 Insurance 3000 Telephone 1500 Website Rentals 500 30000 Operating Income of URL 77000 Part -2 URL Services affected if the Design segment of Custom Web pages division eliminated Basic Web Pages Custom Web pages Total Service Revenue 200000 90000 290000 Less Total Variable Cost 77000 40000 117000 Contribution Margin 123000 50000 173000 Less: Direct Fixed Cost 16000 26000 42000 Less: Common Fixed Assets Building Rent 24000 Suppliers 1000 Insurance 3000 Telephone 1500 Website Rentals 500 30000 Operating Income of URL 101000 Decision: Since profit under alternative 2 is higher ($ 101000) hence it has to be adopted.

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