Gillaspie Brothers Outfitters sells equipment to outdoors enthusiasts. Sam Gilla

Question

Gillaspie Brothers Outfitters sells equipment to outdoors enthusiasts. Sam Gillaspie, the company’s president, just received the following income statement reporting the results of the past year.

Sam is concerned that two of the company’s divisions are showing a loss, and he wonders if the company should stop selling hunting and fishing gear to concentrate solely on camping gear.

Hunting Camping Fishing Total Sales revenue $1,360,000 $3,900,000 $2,560,000 $7,820,000 Variable cost of goods sold 919,000 2,535,000 2,065,600 5,519,600 Fixed cost of goods sold 123,800 202,200 178,000 504,000 Gross profit 317,200 1,162,800 316,400 1,796,400 Variable operating expenses 183,800 624,000 256,000 1,063,800 Fixed operating expenses 85,200 91,000 78,900 255,100 Common fixed costs 65,000 139,000 104,900 308,900 Operating income ($16,800 ) $308,800 ($123,400 ) $168,600

Explanation / Answer

Part 1)

The segment margin is calculated as follows:

Since, fixed cost of goods sold and fixed operating expenses are traceable to each division, they will be considered in the calculation of segment margin.

________

Part 2)

The company should proceed ahead only with the closure of "Fishing Department" as this department continues to suffer loss even after the adjustment of common fixed expenses. The company should continue to operate the remaining 2 departments (Hunting and Camping) as they are providing positive operating income after adjustment for common fixed expenses.

________

Part 3)

The income statements after allocation of common fixed expense on the basis of sales are given below:

The company should close both Hunting and Fishing Divisions as both are generating negative operating income.

Hunting Camping Fishing Total Sales revenue 1,360,000 39,00,000 25,60,000 78,20,000 Variable cost of goods sold 919,000 2,535,000 2,065,600 5,519,600 Fixed cost of goods sold 123,800 202,200 178,000 504,000 Gross profit 317,200 1,162,800 316,400 1,796,400 Variable operating expenses 183,800 624,000 256,000 1,063,800 Fixed operating expenses 85,200 91,000 78,900 255,100 Operating income $48,200 $447,800 -$18,500 $477,500

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