Sunland Equipment sells equipment to sports enthusiasts. Doug Sunland, the compa

Question

Sunland Equipment sells equipment to sports enthusiasts. Doug Sunland, the company’s president, just received the following income statement reporting the results of the past year.

Doug is concerned that two of the company’s divisions are showing a loss, and he wonders if the company should stop selling baseball and basketball gear to concentrate solely on soccer gear.

Prepare a segment margin income statement. Fixed cost of goods sold and fixed operating expenses can be traced to each division.

Baseball Soccer Basketball Total Sales revenue $1,320,000 $3,780,000 $2,484,000 $7,584,000 Variable cost of goods sold 891,000 2,457,000 2,001,600 5,349,600 Fixed cost of goods sold 120,200 196,200 172,800 489,200 Gross profit 308,800 1,126,800 309,600 1,745,200 Variable operating expenses 178,200 604,800 248,400 1,031,400 Fixed operating expenses 82,800 88,200 76,500 247,500 Common fixed costs 63,000 135,000 101,700 299,700 Operating income ($15,200 ) $298,800 ($117,000 ) $166,600 Baseball Soccer Basketball Total Sales Revenue Traceable Fixed Expenses Operating Expenses Cost of Goods Sold Operating Income Variable Expenses Segment Margin Common Fixed Expenses Contribution Margin

Explanation / Answer

Solutions:

Doug should not consider closing base ball Business - Because it can recover its traceable fixed cost.

Doug should consider closing basketball Business - It is not able to recover its fixed cost fully.

If allocation method is changed, margin income statement shall be as follow:

Changing allocation method shall not change the decision .

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