Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for the previous year: Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between the divisions. What would Franklin's profit margin be if Charles were dropped?
A) $60,000
B) $80,000
C) $100,000
D) $230,000

Question

Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for the previous year:  Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between the divisions. What would Franklin's profit margin be if Charles were dropped?
A) $60,000 
B) $80,000 
C) $100,000 
D) $230,000

Quizplus · Accepted Answer

If Charles were dropped, Franklin, Inc. would only have the Seward division's income statement. To calculate Franklin's profit margin under this scenario, we need to recalculate the income statement with the relevant numbers:

Division income: $2,000,000
Variable costs: $1,300,000
Contribution margin: $700,000
Fixed costs: $800,000 - $300,000 = $500,000
Operating income: $200,000

Profit margin = Operating income / Division income = $200,000 / $2,000,000 = 0.1 or 10%

Therefore, Franklin's profit margin would be 10% if Charles were dropped. The increase in profit margin is due to the elimination of Charles' operating loss of $80,000. Therefore, the correct answer is B) $80,000.