(Product line decision) North American Toy Company’s operations are separated into two geographical divisions: the United States and Mexico. The operating results of each division for 1998 are shown below:

Corporate fixed costs are allocated to the divisions based on relative sales. Assume that all direct fixed costs of a division could be avoided if the division were eliminated. Because the U.S. Division is operating at a loss, the president is considering eliminating it.

a. If the U.S. Division had been eliminated at the beginning of the year, what would pretax income have been for North American Toy Company?

b. Recast the income statements into a more meaningful format than the one shown above. Why would total corporate operating results go from a $54,000 loss to the results determined in part a above?LO1

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Sales Variable costs Contribution margin Fixed costs: Direct Segment margin Fixed costs: Corporate Operating income (loss) UNITED STATES MEXICO TOTAL $3,600,000 (2,370,000) $1,230,000 $1,800,000 (1,044,000) $ 756,000 $5,400,000 (3,414,000) (450,000) (240,000) $ 780,000 $ 516,000 (900,000) (450,000) $1,986,000 (690,000) $1,296,000 1,350,000 $ (120,000) $ 66,000 $ (54,000)