Question
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
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.
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