Serene Assurance Company provides both automobile and life insurance. The projected income statements for the two products are as follows:

The president of the company is considering dropping the automobile insurance. However, some policyholders prefer having their auto and life insurance with the same company, so if automobile insurance is dropped, sales of life insurance will drop by 15 percent. No significant non-unit-level activity costs are incurred.
Required:
1. If Serene Assurance Company drops automobile insurance, by how much will income increase or decrease? Provide supporting computations.
2. Assume that increasing the advertising budget by $50,000 will increase sales of automobile insurance by 10 percent and life insurance by 3 percent. Prepare a segmented income statement that reflects the effect of increased advertising. Should advertising beincreased?

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Automobile Insurance Life SHrance S 4,200,000 2,000,000 9,600,000 2,400,000 500,000 S (30,000) 1,900,000 200,000 30,000) 1,700,000 Salcs Less: Variable expenses 3,830,000 S 370,000 400,000 Contribution margin Segment margin Operating income (loss) Less: Direct fixed expenses Less: Common fixed expenses (allocated) 100.000