University Hospital provided the following income statement for two of its divis
ID: 2532132 • Letter: U
Question
University Hospital provided the following income statement for two of its divisions: Diagnostic and Outpatient.
Diagnostic
Outpatient
Total
Revenue
$500,000
$400,000
$900,000
Variable expenses
Product
220,000
140,000
360,000
Selling and administrative
150,000
80,000
230,000
Contribution margin
130,000
180,000
310,000
Less fixed costs
180,000
125,000
305,000
Operating income
($50,000)
$ 55,000
$ 5,000
The CEO of the hospital is not pleased with the division’s performance, and he believes that the Diagnostic division is responsible for its dismal result and wants to consider outsourcing diagnostic procedures.
Show Your Work!!
The controller has determined that the hospital’s headquarters allocated $98,000 and $32,000 in common administrative fixed costs, respectively, to Diagnostic and Outpatient divisions. Prepare a segment margin income statement that will provide the CEO with a better basis for evaluating the two divisions’ performance.
Diagnostic
Outpatient
Total
Revenue
$500,000
$400,000
$900,000
Variable expenses
Product
220,000
140,000
360,000
Selling and administrative
150,000
80,000
230,000
Contribution margin
130,000
180,000
310,000
Less fixed costs
180,000
125,000
305,000
Operating income
($50,000)
$ 55,000
$ 5,000
Explanation / Answer
Diagnostic Outpatient University hospital Revenue 500,000 400,000 900,000 Variable expenses : Product 220,000 140,000 360,000 Selling and administrative 150,000 80,000 230,000 Contribution margin 130,000 180,000 310,000 Traceable fixed costs 82,000 (180,000-98,000) 93,000 (125,000-32,000) 175,000 Segment margin 48,000 87,000 135,000 Common costs 130,000 (98,000+32,000) Profit 5,000
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