The segmented income statement for XYZ Company for the year ended December 31, 2
ID: 2348186 • Letter: T
Question
The segmented income statement for XYZ Company for the year ended December 31, 2010, follows:
The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here:
The remaining fixed expenses are considered to be corporatewide expenses that have been allocated to each product line based on sales revenue.
What will be the effect of the decision to discontinue product A on operating income? (Input the amount as positive value. Omit the "$" sign in your response.)
Assume that product A is discontinued. Prepare a segmented income statement for the remaining products. Allocate corporatewide fixed expenses as described. (Input all amounts as positive values except operating losses which should be indicated by a minus sign. Omit the "$" sign in your response.)
Starting with the segmented income statement, use the information you discovered during your investigation to present a more appropriately designed segmented income statement. (Input the amount as positive value. Omit the "$" sign in your response.)
XYZ COMPANYSegmented Income Statement
For the Year Ended December 31, 2010 Total
Company Product A Product B Product C Sales $ 1,200,000 $ 600,000 $ 240,000 $ 360,000 Variable expenses 552,000 300,000 108,000 144,000 Contribution margin $ 648,000 $ 300,000 $ 132,000 $ 216,000 Fixed expenses $ 564,000 328,000 92,000 144,000 Operating income $ 84,000 $ (28,000 ) $ 40,000 $ 72,000
Explanation / Answer
a.
Loss of contribution margin……………………………...
$(300,000)
Less direct fixed expenses………………………………..
148,000
Decrease in operating income……………………………
$(152,000)
Operating income will decrease by $152,000 for the XYZ Company if it discontinues Product A.
b.
XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company
Product A
Product B
Product C
Sales…………………….
$ 600,000
$ -
$240,000
$ 360,000
Variable expenses………
252,000
-
108,000
144,000
Contribution margin……
$ 348,000
$ -
$ 132,000
$ 216,000
Direct fixed expenses…..
56,000
-
20,000
36,000
Common fixed expenses..
360,000
-
144,000*
216,000*
Operating income………
$ (68,000)
$ (32,000)
$ (36,000)
* Calculation for allocation of corporate-wide expenses based on sales revenue:
Product Y = $240,000 / $600,000 = 40% * $360,000 = $144,000
Product Z = $360,000 / $600,000 = 60% * $360,000 = $216,000
Note: The decrease in operating income for XYZ Company is $152,000, decreasing from an operating income of $84,000 to an operating loss of $(68,000).
c.
XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company
Product A
Product B
Product C
Sales…………………….
$ 1,200,000
$ 600,000
$ 240,000
$ 360,000
Variable expenses………
552,000
300,000
108,000
144,000
Contribution margin……
$ 648,000
$ 300,000
$ 132,000
$ 216,000
Direct fixed expenses…..
204,000
148,000
20,000
36,000
Segment margin………..
$ 444,000
$ 152,000
$ 112,000
$ 180,000
Common fixed expenses..
360,000
Operating income………
$ 84,000
a.
Loss of contribution margin……………………………...
$(300,000)
Less direct fixed expenses………………………………..
148,000
Decrease in operating income……………………………
$(152,000)
Operating income will decrease by $152,000 for the XYZ Company if it discontinues Product A.
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