Shannon, hic., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below.

On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the company's vice pres¬
ident of finance.
MADGE: The Party Supplies Division is killing its. It's not even covering its own fixed costs. I'm beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasn't done much better than the previous divisional manager.
BOB: Well, before you get too excited about the situation, perhaps you should evaluate Paula's most recent proposals. She wants to spend $10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by $25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10% if the right adver¬
tising is done—and done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30%. The cost of the lease is $95,000 per quarter.
Upon hearing this news, Madge calmed considerably, and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confi¬
dence in Paula's judgment and abilities.
Required:
1. Assuming that Paula's proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division? Prepare a segmented income statement for the next quarter that reflects the implementation of Paula's proposals. Assume that the Cookware Division's sales increase by 5% for the next quarter and that the same cost relationships hold.
2. Suppose that everything materializes as Paula projected except for the 10% increase in sales—no change in sales revenues took place. Are the proposals still sound? What if the variable costs are reduced by 40% instead of 30% with no change in sales?

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Party Supplies Division Cookware Division Total Sales $500,000 $750,000 $1,250,000 Less: Variable expenses 425,000 460,000 885,000 Contribution margin $ 75,000 $290,000 $ 365,000 Less: Direct fixed expenses 85,000 110,000 195,000 Segment margin $ (10,000) $180,000 $ 170,000 Less: Common fixed expenses 130,000 Operating income $ 40,000