25. Differential Analysis The following is a performance breakdown of Hillhole L
ID: 2406038 • Letter: 2
Question
25. Differential Analysis The following is a performance breakdown of Hillhole Landscaping Company: a. GEOGRAPHIC SEGMENT Louisiana ArkansasTOTAL $2,250,000 $250 (200,000)(1.700,000) Sales Variable Costs Cont. Margin Fixed Costs $1,200,000 $800,000 60,000 560,000 150,000 50,000 20,000 3,000 6,000 5,000 6,000 80,000 5,000 2,000 2,000 5,000 2,000 50,000 2,000 3,000 4,000 2,000 1.000 280,000 27,000 8,000 12,000 12,000 9,000 Salaries Advertising Administrative Depreciation R & D Other Total Fixed Costs Net Income (190,000) (96,000) (62,000) (348,000) 160,00054,000 2,000) Hillhole is considering eliminating the Arkansas segment. If Arkansas is eliminated, half the Salaries and all costs from Advertising and Other will not have to be paid. Administrative, Depreciation, and R&D; will still have to be covered by the remaining segments. REQUIRED: What will be the NET EFFECT on Net Income if the Arkansas segment is eliminated? (Ex.: SXXX decrease or SYYY increase) ANSWERExplanation / Answer
Answer
Texas
Lousiana
Arkansas [ELIMINATED]
TOTAL
Sales
$ 1,200,000.00
$ 800,000.00
$ -
$ 2,000,000.00
Variable costs
$ (850,000.00)
$ (650,000.00)
$ -
$ (1,500,000.00)
Contribution margin
$ 350,000.00
$ 150,000.00
$ -
$ 500,000.00
Fixed Costs:
Salaries
$ 150,000.00
$ 80,000.00
$ 25,000.00
$ 255,000.00
Advertising
$ 20,000.00
$ 5,000.00
$ -
$ 25,000.00
Administrative
$ 3,000.00
$ 2,000.00
$ 3,000.00
$ 8,000.00
Depreciation
$ 6,000.00
$ 2,000.00
$ 4,000.00
$ 12,000.00
R & D
$ 5,000.00
$ 5,000.00
$ 2,000.00
$ 12,000.00
Other
$ 6,000.00
$ 2,000.00
$ -
$ 8,000.00
Total Fixed Cost
$ (190,000.00)
$ (96,000.00)
$ (34,000.00)
$ (320,000.00)
Net Income
$ 160,000.00
$ 54,000.00
$ (34,000.00)
$ 180,000.00
Net Income when Arkansas was not eliminated = $ 212,000 [given in question].
Effect on Net Income: Net Income will decrease by $ 32,000 [ $ 212,000 – $ 180,000], if Arkansas is ELIMINATED.
Texas
Lousiana
Arkansas [ELIMINATED]
TOTAL
Sales
$ 1,200,000.00
$ 800,000.00
$ -
$ 2,000,000.00
Variable costs
$ (850,000.00)
$ (650,000.00)
$ -
$ (1,500,000.00)
Contribution margin
$ 350,000.00
$ 150,000.00
$ -
$ 500,000.00
Fixed Costs:
Salaries
$ 150,000.00
$ 80,000.00
$ 25,000.00
$ 255,000.00
Advertising
$ 20,000.00
$ 5,000.00
$ -
$ 25,000.00
Administrative
$ 3,000.00
$ 2,000.00
$ 3,000.00
$ 8,000.00
Depreciation
$ 6,000.00
$ 2,000.00
$ 4,000.00
$ 12,000.00
R & D
$ 5,000.00
$ 5,000.00
$ 2,000.00
$ 12,000.00
Other
$ 6,000.00
$ 2,000.00
$ -
$ 8,000.00
Total Fixed Cost
$ (190,000.00)
$ (96,000.00)
$ (34,000.00)
$ (320,000.00)
Net Income
$ 160,000.00
$ 54,000.00
$ (34,000.00)
$ 180,000.00
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