Trent Weaver was reviewing the latest income statement for Taryn Enterprises. Fo

Question

Trent Weaver was reviewing
the latest income statement for Taryn Enterprises. For the second year in a row, the Collectibles
division was showing a negative segment margin, and Trent thought it was time to
close the division to increase the company’s operating income. The income statement that he
examined follows.

When Trent broke the news, Taylor Tatum, manager of the Collectibles division, was upset.
Taylor thought that Trent could be making a snap judgment, and suggested that he look at
the division’s detailed operating results. The Collectibles division is composed of two groups,
Sports Memorabilia and Coins and Stamps. Sports Memorabilia accounts for 60% of the division’s
sales and contribution margin; Coins and Stamps accounts for the other 40%. Sports
Memorabilia’s traceable fi xed costs are $810,000; Coins and Stamps, $245,000.

Required

a. Prepare a segment margin income statement for the Collectibles division that shows the
segment margin of each group.
b. Should Trent Weaver close the Collectibles Division? Why or why not?

promotions division collectibles division total sales revenue $5,300,000 $2,860,000 $8,160,000 less variable exp 3,650,000 1,645,000 5,295,000 contribution margin 1,650,000 1,215,000 2,865,000 less traceable fixed exp 943,000 1,275,000 2.218,000 segment margin $707,000 $(60,000) 647,000 common fixed costs 555,000 net operating income $92,000

Explanation / Answer

A)

B) Closing the entire Collecibles division does not make sense since Coin and Stamps division has a positive segment margin. Trent Weaver can consider closing Sports group.

Sports Memorabilia Coins and Stamps Collectibles Division sales revenue 17,16,000.00 11,44,000.00 28,60,000.00 less variable exp 9,87,000.00 6,58,000.00 16,45,000.00 contribution margin 7,29,000.00 4,86,000.00 12,15,000.00 less traceable fixed exp 8,10,000.00 2,45,000.00 10,55,000.00 Less untraceable fixed exp 1,32,000.00 88,000.00 2,20,000.00 (12,75,000-10,55,000) divided into ratio of sales segment margin -2,13,000.00 1,53,000.00 -60,000.00

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