Sheridan, Inc. operates three divisions, Weak, Average, and Strong. As it turns

Question

Sheridan, Inc. operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. “Survival of the fittest, I say!” was his response when the Weak division’s manager insisted that his division earned money for the company. Following is the most recent financial analysis for each division:

Weak Average Strong Sales revenue $128,000 $343,500 $538,400 Variable expenses 51,900 199,200 306,200 Contribution margin 76,100 144,300 232,200 Direct expenses 33,700 75,500 110,200 Allocated expenses 59,800 59,800 59,800 Operating income $(17,400 ) $9,000 $62,200Based on the way allocated expenses are divided among the divisions, what do you think will happen to the Average division if the company continues to prepare financial statements in this way, assuming Weak was dropped?
If Weak is dropped, then $

will be allocated to Average, resulting in a $

for the division as currently reported

Explanation / Answer

If Weak is dropped, then $89,700 will be allocated to Average, resulting in a $20,900 operating loss for the division as currently reported.

Calculations:

If Weak is dropped, the total allocated expenses of $179,400 ($59,800 x 3) will get equally allocated between Average and Strong to the extent of $89,700 each thus resulting in a loss of $20,900 for Average division.

Average Contribution margin 144300 Direct expenses 75500 Allocated expenses 89700 Operating income $ -20900

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