Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 50

Segmented income statement The president of Truman, 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:

	Total Company	Division
		A	B	C
Sales	$400,000	$160,000	$100,000	$140,000
Variable expenses	240,000	104,000	60,000	76,000
Contribution margin	$160,000	$ 56,000	$ 40,000	$ 64,000
Fixed expenses	120,000	40,000	44,000	36,000
Net income (loss)	$ 40,000	$ 16,000	$ (4,000)	$ 28,000

The president was told that the fixed expenses of $120,000 included $84,000 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.

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b. Calculate what the company’s net income would be if Division B were closed down.

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c. Write a policy statement related to the allocation of fixed expenses.

Step 1 of 4

Segmented income statement :

This income statement gives emphasis on the segment in spite of the performance as a whole in the company’s financial accounts. A contribution margin system is used to assess the results of different segments.

Income statement of Truman, Inc. for the last year is as follows:

Table 1: Income statement of T, Inc.

Particulars	Total company ($)	Division
		A ($)	B ($)	C ($)
Sales	$400,000	$160,000	$100,000	$140,000
Variable expense	240,000	104,000	60,000	76,000
Contribution margin	160,000	56,000	40,000	64,000
Fixed expenses	120,000	40,000	44,000	36,000
Net income (loss)	40,000	16,000	(4,000)	28,000