The president of Ravens, Inc., attended a seminar about the contribution margin

Question

The president of Ravens, 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: Division Total Company Sales Variable expenses Contribution margin Fixed expenses Net income (loss) $466,000 $182,000 $122,000 $162,000 $204,000 71,000 58,000 $ 75,000 51000 65,000 262,000 111,000 163,000900 41,000 20,000 (7,000) 28,000 : 47,000 The president was told that the fixed expenses or $163,000 included $90,000 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 a. Evaluate the president's remark. The president's remark ignores the misleading result of arbitrarily allocated fixed expenses. b. Calculate what the company's net income would be if Division B were closed down. Net income $ 35,000 Divisio c. What is the policy statement related to the allocation of fixed expenses. xpenses,

Explanation / Answer

Answers

A

B

C

Total

Total fixed expenses

51000

65000

47000

163000

Allotted fixed expenses [90000 equally]

30000

30000

30000

90000

Avoidable fixed expenses

$21000

$35000

$17000

73000

If Division B gets closed down, avoidable fixed cost of ‘B’ of $35000 will not occur. Total fixed expenses will then be $128,000 [163000-35000]

Division A

Division C

Total Company

Sales

182000

162000

$344000

Variable expenses

111000

87000

$198000

Contribution margin

71000

75000

$146000

Fixed expense

[21000+30000]

[17000+30000]

$128000

Net Income (Loss)

$18000

A

B

C

Total

Total fixed expenses

51000

65000

47000

163000

Allotted fixed expenses [90000 equally]

30000

30000

30000

90000

Avoidable fixed expenses

$21000

$35000

$17000

73000

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