Physical Phitness, Inc. operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. “Survival of the fittest, I say!” was his response when the Weak division’s manager, Anna Hoffman, insisted that her division earned money for the company. Following is the most recent financial analysis for each division:

Required

a. Prepare a revised income statement showing the segment margin for each division; add a column for the company as a whole.

b. By how much would total income change if the Weak division were dropped?

c. Based on the way allocated expenses are divided among the divisions, what do you think will happen to the Average division if the company continues to prepare financial statements in the original format?

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Weak Average Strong Sales revenue $125,000 45,000 $450,000 $600,000 300,000 Variable expenses 250,000 Contribution margin Direct expenses Allocated expenses 80,000 200,000 300,000 30,000 80,000 100,000 70,000 70,000 70,000 Operating income $ (20,000) $ 50,000 $130,000