The president of Truman, Inc., attended a seminar about the contribution margin
ID: 2445427 • Letter: T
Question
The president of Truman, 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:
The president was told that the fixed expenses of $145,000 included $84,000 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:
The president of Truman, 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:
Explanation / Answer
Income statment if Division B is continued
Company Division A Division B Division C
Contribution $ 195000 72000 52000 71000
Fixed cost $ 145000
Income statement $ 50000
Note :- Fixed cost need not be apportioned to the divisions because irrespective of the activity fixed cost would be necessarily incurred
If Divisioin B is closed, the contribution from Division B would be lost but the fixed cost would remain the same because of the nature of fixed cost.
The Income statement would therefore be ( on elimination of Division B) :-
Company Division A Division C
Contribution $143000 $72000 $71000
Fixed cost $145000
Loss $ 2000
The loss can also be calculated in the following manner :-
Income if division B is not closed $50000
Loss of contribution on closing Division B $ 52000
Loss $ 2000
Therefore,the decision would be to continue Division B to avoid loss of $2000.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.