Product line) Operations of Tanner Oil Drilling Services are separated into two geographical divisions: United States and Mexico. The operating results of each division for 2006 follow.

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

a. If the U.S. Division had been eliminated at the beginning of the year, what would have been Tanner’s pre-tax income?

b. Recast the income statements into a more meaningful format than the one given. Why would total corporate operating results go from a $108,000 loss to the results determined in part (a)?

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Sales Variable costs Contribution margin Direct fixed costs Segment margin Corporate fixed costs Operating income (loss) United States $ 7,200,000 (4,740,000) $ 2,460,000 (900,000) $ 1,560,000 (1,800,000) $ (240,000) Mexico $ 3,600,000 (2,088,000) $ 1,512,000 (480,000) $ 1,032,000 (900,000) 132,000 Total $10,800,000 (6,828,000) $ 3,972,000 (1,380,000) $ 2,592,000 (2,700,000) $ (108,000)