10-6 Segment margin income statement (LO 2)

Kimball Equipment sells equipment to sports enthusiasts. Doug Kimball, the companys president, just received the following income statement reporting the results of the past year.

	Baseball		Soccer		Basketball		Total
Sales revenue	$1,450,000		$3,600,000		$1,380,000		$6,430,000
Variable cost of goods sold	950,000		2,340,000		960,000		4,250,000
Fixed cost of goods sold	140,000		188,000		120,000		448,000
Gross profit	360,000		1,072,000		300,000		1,732,000
Variable operating expenses	185,000		576,000		210,000		971,000
Fixed operating expenses	90,000		84,000		105,000		279,000
Common fixed costs	120,000		130,000		80,000		330,000
Operating income	($35,000)		$282,000		($95,000)		$152,000

Doug is concerned that two of the companys divisions are showing a loss, and he wonders if the company should stop selling baseball and basketball gear to concentrate solely on soccer gear.

Required

a. Prepare a segment margin income statement. Fixed cost of goods sold and fixed operating expenses can be traced to each division.

b. Should Doug close the baseball and basketball divisions? Why or why not?

c. Doug wants to change the allocation method used to allocate common fixed costs to the divisions. His plan is to allocate these costs based on sales revenue. Will this new allocation method change your decision on whether to close the baseball and basketball divisions? Why or why not?