ou have been provided the following information for the ABC Division of Adelphi,

ID: 2558209 • Letter: O

Question

ou have been provided the following information for the ABC Division of Adelphi, Inc.
Sales revenue:    $5,480,000
Non-controllable fixed costs traceable to the division:    1,630,000
Corporate overhead allocated to ABC:    600,000
Controllable fixed costs of the division:    1,210,000
Variable costs as a percentage of Sales:    40%

A. Compute the following for the ABC Division:
      1. ABC's contribution margin.
      2. ABC's Controllable profit margin.
      3. ABC's Segment profit margin.
B. Should the company continue to run ABC or shut it down? Why?
C. Assume that management made the decision to prepare a segmented income statement that reflected ABC's four operating departments. Would all $1,210,000 of the controllable fixed costs of ABC be easily traceable to the departments? Briefly explain.

Explanation / Answer

Answer

Sales revenue

$5480000

(-) Variable cost 40%

$2192000

1. Contribution margin

$3288000

(-) Controllable fixed cost

$1210000

2. Controllable profit margin

$2078000

(-) Non controllable traceable fixed cost

$1630000

3. Segment profit margin

$448,000

The company should continue to ABC as its Net Income is positive $448,000 before allocation of corporate Fixed overhead. It’s a profitable segment.

No, $1,210,000 will not be easily traceable to the departments. Fixed cost allocation depends on various allocation basis. Any different basis will have different results.