Elimination of Unprofitable Segment Decision Custom\'s manager, wants to find ou

Question

Elimination of Unprofitable Segment Decision Custom's manager, wants to find out why Custom is not profitable. He has prepared the reports that follow. LO4 SPREADSHEET P3. URI Services has two divisions: Basic Webpages and Custom Webpages. Ricky Vega, d operating income: $77,000 R Services egnent margin: $131,000 URL Services Segmented Income Statement For the Year Ended December 31 Custom Basic Webpages Total (1,000 units) (200 units) Company Service revenue Less variable costs: $150,000 520000 $15000 35000 Direct professional labor: desigr Direct professional labor: install Direct professional labor: maintain Total variable costs 32,000 30,000 15,000 77,000 $123,000 $80,000 112,000 34,000 51,000 $197,000 $153,000 4,000 36,000 $120,000 $ 30,000 Contribution margin Less direct fixed costs: Depreciation on computer equipment Depreciation on servers Total direct fixed costs 6,000 10,000 16,000 $107,000 $ 12,000 18,000 30,000 48,000 $105,000 20,000 32,000 Segment margin Less common fixed costs: Building rent Supplies Insurance Telephone Website rental Total common fixed costs 24,000 1,000 3,000 1,500 500 30,000 75,000 Operating income (Continued)

Explanation / Answer

1 If Custom Webpage Division is elliminated: Total Company Service Revenue $200,000 Less :Total Variable Costs $77,000 Contribution Margin $123,000 Less: Total Direct Fixed Costs $16,000 Less:Total Common Fixed costs $30,000 Operating Income $77,000 a. URLService will Improve b.The total segment margin and operating income Increase by $2,000 (77000-75000) c.The revised operating income will be $77,000 2 If Design segment of Custom Webpages is elliminated: Install Maintain Total Service Revenue $25,000 $65,000 $90,000 Less Variable costs $4,000 $36,000 $40,000 Contribution Margin $21,000 $29,000 $50,000 Less Direct Fixed costs $13,000 $13,000 $26,000 Segment Margin $8,000 $16,000 $24,000 Basic Webpages CustomWebpages Total Service Revenue $200,000 $90,000 $290,000 Less :Total Variable Costs $77,000 $40,000 $117,000 Contribution Margin $123,000 $50,000 $173,000 Less: Total Direct Fixed Costs $16,000 $26,000 $42,000 Segment Margin $107,000 $24,000 $131,000 Less:Total Common Fixed costs $30,000 Operating Income $101,000 a. URLService will Improve b.The total segment margin and operating income Increase by $26,000 (101000-75000) t0 $101,000 c.Custom Webpages segment margin Increases to $24,000 This is due to ellimination of Segment Loss of $26,000

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