(Product line) Online Toy Co.’s operations are separated into two geographical divisions: United States and Mexico. The operating results of each division for 2001 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 Online Toy Co.?

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