The management accountant for Tony\'s Skateboard Company has prepared the follow
ID: 2520683 • Letter: T
Question
The management accountant for Tony's Skateboard Company has prepared the following segmented income statement for each of its three product lines.
Jammer Cruise Flight Total
Sales $400,000 $250,000 $350,000 $1,000,000
Variable expenses 260,000 150,000 190,000 600,000
Contribution margin 140,000 100,000 160,000 400,000
Other costs 20,000 30,000 20,000 70,000
Segment margin 120,000 70,000 140,000 330,000
Allocated avoidable costs 30,000 30,000 20,000 80,000
Segment income 90,000 40,000 120,000 250,000
Allocated corporate costs 50,000 50,000 50,000 150,000
Corporate profit $40,000 $(10,000) $70,000 $100,000
Required:
a. Do you recommend dropping the Cruise product line? Why or why not?
b. If the Jammer product line had been discontinued, the short-term effect on corporate profits would be a decrease of what amount?
c. Assume that the Flight product line has been discontinued and long-term capacity has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of what amount?
d. Assume that an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, which product line should receive the advertising dollars? Why?
e. How would you change the format of the segment margin statement above to make it more understandable?
Explanation / Answer
a. No, Won’t recommend dropping the Cruise product line because,
70,000 margin of that particular segment tells you that the segment is contributing 70,000.
And also the income of the segment is $40,000 including available costs.
b. When the Jammer product line discontinued,
profits would immediately decrease by $140,000 which is the exact amount of contribution made by the product line. And all fixed costs attributed to Jammer cant be avoided.
c. Flight product line were discontinued and long-term capacity has had time to adjust, corporate profits would decrease = contribution – avoidable costs = 160000-40000= $120,000, the amount reported for the segment income.
d. To maximize corporate profits, the Flight product line should receive the advertising dollars because it has a contribution margin of approximately 40%(160,000/400,000), the highest contribution margin of the three product lines.
e. Present Statement of segment margins could be made more understandable, when the allocated corporate costs were only listed under the company total column.
Not made as a part of the computation for each product line segment.
It is obvious that the corporate costs are arbitrarily allocated equally to each product line and arbitrary allocations do not aid in decision making.
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