Zachary Company operates three segments. Income statements for the segments impl

Question

Zachary Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.

a)Prepare a schedule of relevant sales and costs for Segment A.

b)

Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.

ZACHARY COMPANY Income Statements for the Year 2018 Segment A B C Sales $ 168,000 $ 246,000 $ 254,000 Cost of goods sold (122,000 ) (74,000 ) (85,000 ) Sales commissions (16,000 ) (25,000 ) (30,000 ) Contribution margin 30,000 147,000 139,000 General fixed operating expenses (allocation of president’s salary) (40,000 ) (39,000 ) (35,000 ) Advertising expense (specific to individual divisions) (4,000 ) (14,000 ) 0 Net income $ (14,000 ) $ 94,000 $ 104,000

a)Prepare a schedule of relevant sales and costs for Segment A.

Relevant Rev. and Cost items for Segment A Sales Advertising expense Cost of goods sold Sales commissions Effect on income

Explanation / Answer

Answer 1

Note : The above computation also means that if Segment A is eliminated the overall net income will drop by $26,000

Answer 2

ZACHARY COMPANY

Comparative Income Statements for the Year 2018

Note :

Relevant Rev. & Cost items for Segment A Sales $168,000 Less : Advertising expense ($4,000) Less : Cost of goods sold ($122,000) Less : Sales commissions ($16,000) Effect on income [incremental] $26,000

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