The following customer segmented quarterly income statement is for Accounting Associates.

Management is concerned about the significant losses associated with the Nguyen account and would like to drop this customer. Allocated fixed costs are assigned to customers based on sales revenue. If Nguyen is dropped, total allocated fixed costs are assigned to the remaining customers, and all variable and direct fixed costs for the Nguyen account will be eliminated.

Required

a. Perform differential analysis using the format presented in Table 7.7. Assume keeping all customers is Alternative 1, and dropping the Nguyen account is Alternative 2.

b. Which alternative is best? Explain.

c. Summarize the result of dropping the Nguyen account using the format presented in Table 7.8.

d. Explain what happened to the profitability of the other two customers as a result of dropping the Nguyen account.

Table 7.7

Table 7.8

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Customers Sanchez Nguyen Decker Sales revenue Variable costs $300,000 $1,500,000 $200,000 250,000 1,200,000 160,000 Contribution margin $ 50,000 $ 300,000 $ 40,000 Direct fixed costs 15,000 315,000 10,000 Allocated fixed costs 6,000 30,000 4,000 Profit (loss) $ 29,000 $ (45,000) $ 26,000 Total $2,000,000 1,610,000 $ 390,000 340,000 40,000 10,000