1.The following monthly segmented income statement is for Durango Company, which has three separate product lines (A, B, and C).

A

B

C

Total

Sales revenue

$37,500

$50,000

$12,500

$100,000

Variable costs

$16,000

$27,500

$5,000

$48,500

Contribution margin

$21,500

$22,500

$7,500

$51,500

Direct fixed costs

$19,500

$16,000

$3,500

$39,000

Allocated fixed costs

$3,750

$5,000

$1,250

$10,000

Profit (loss)

$(1,750)

$1,500

$2,750

$2,500

Management is concerned about the losses associated with product line A and is considering dropping this product line. Allocated fixed costs are assigned to product lines based on sales. If product line A is eliminated, total allocated fixed costs are assigned to the remaining product lines, and all variable and direct fixed costs for product line A will be eliminated.

a)Perform differential analysis of these two alternatives (keep product line A or drop it). Follow the format presented in Panel C of Figure 6.6 "Product Line Differential Analysis for Barbeque Company".

b)Which alternative is best? Explain.

c)Explain why the loss shown for product line A in the segmented income statement might be misleading to management.