Regional America 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. How¬
ever, some policyholders prefer having their auto and life insurance with the same com¬
pany, so if automobile insurance is dropped, sales of life insurance will drop by 10%. There are no significant nonunit-level activity costs.
Required:
1. Should the company drop or keep the automobile insurance? Provide supporting com¬
putations.
2. Assume that increasing the advertising budget by $20,000 will increase sales of auto¬
mobile insurance by 5% and life insurance by 3%. Prepare a segmented income state¬
ment that reflects the effect of increased advertising. Should advertising be increased?

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Sales Less: Variable costs Contribution margin Less: Direct fixed expenses Segment margin Less: Common fixed costs (allocated) Operating income (loss) Automobile Life Insurance Insurance $6,000,000 5,400,000 S 600,000 620,000 $ (20,000) 100,000 $ (120,000) $12,000,000 9,600,000 $ 2,400,000 500,000 $ 1,900,000 200,000 $ 1,700,000