Gillaspie Brothers Outfi tters sells equipment to outdoors enthusiasts. Sam Gill
ID: 2718504 • Letter: G
Question
Gillaspie Brothers Outfi tters sells
equipment to outdoors enthusiasts. Sam Gillaspie, the company’s president, just received the
following income statement reporting the results of the past year.
Sam is concerned that two of the company’s divisions are showing a loss, and he wonders if
the company should stop selling hunting and fi shing gear to concentrate solely on camping
gear.
Required
a. Prepare a segment margin income statement. Fixed cost of goods sold and fi xed
operating expenses can be traced to each division.
b. Should Sam close the hunting and fi shing divisions? Why or why not?
c. Sam wants to change the allocation method used to allocate common fi xed costs to
the divisions. His plan is to allocate these costs based on sales revenue. Will this new
allocation method change your decision on whether to close the hunting and fi shing
divisions? Why or why not?
Explanation / Answer
Answer a)
Hunting
Camping
Fishing
Total
Sales revenue
1,250,000
3,600,000
2,380,000
7,230,000
Variable Cost of goods sold
850,000
2,340,000
1,904,000
5,094,000
Variable operating expenses
170,000
576,000
238,000
984,000
Contribution
230,000
684,000
238,000
1,152,000
Traceable costs
Fixed Cost of goods sold
115,000
188,000
166,000
469,000
Fixed operating expenses
80,000
84,000
73,000
237,000
Total Traceable Cost
195,000
272,000
239,000
706,000
Segment margin
35,000
412,000
(1000)
446,000
Common fixed costs
60,000
130,00
97,000
287,000
Operating Income
(25,000)
282,000
(98,000)
159,000
Answer b) Sam should not close the hunting division. However he can close the Fishing division as Hunting contributes $35,000 in recouping fixed costs whereas Fishing divisions traceable costs are more than its contribution.
Answer c) Allocating common fixed cost on basis of sales revenue
Total Sales revenue = 7,230,000
Hunting = 1,250,000/7,230,000 *287,000 =49,619.6
Fishing = 2,380,000/7,230,000 * 287,000 = 94,475.7
Camping = 3,600,000/7,230,000 *287,000 = 142,904.5
As Segment margin are same
Hunting
Camping
Fishing
Segment margin
35,000
412,000
(1000)
446,000
Common fixed costs
49,620
142,904
94,476
287,000
Operating Income
14620
269,096
(95,476)
159,000
Now, Hunting is profitable with income of $14,620 while Fishing will continue to cause losses. However, losses will reduce to $95,476 because of lesser common fixed cost allotted to Fishing
Hunting
Camping
Fishing
Total
Sales revenue
1,250,000
3,600,000
2,380,000
7,230,000
Variable Cost of goods sold
850,000
2,340,000
1,904,000
5,094,000
Variable operating expenses
170,000
576,000
238,000
984,000
Contribution
230,000
684,000
238,000
1,152,000
Traceable costs
Fixed Cost of goods sold
115,000
188,000
166,000
469,000
Fixed operating expenses
80,000
84,000
73,000
237,000
Total Traceable Cost
195,000
272,000
239,000
706,000
Segment margin
35,000
412,000
(1000)
446,000
Common fixed costs
60,000
130,00
97,000
287,000
Operating Income
(25,000)
282,000
(98,000)
159,000
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