Question
9. Company DEF is comprised of three segments; however, based on the most recent annual income statement, management is considering dropping Segment B due
9. Company DEF is comprised of three segments; however, based on the most recent annual income statement, management is considering dropping Segment B due to its poor performance: Revenues Segment A $374,000 Segment B $316,000 Segment C $555,000 Direct materials $85,000 $52,000 $94,000 Direct labor $108,000 $96,000 $140,000 Manufacturing overhead (MOH) $130,000 $155,000 $181,000 Selling and administrative (S&A) expenses $35,000 $50,000 $82,000 Net operating income/(loss) $16,000 ($37,000) $58,000 Manufacturing overhead (MOH) and selling and administrative (S&A) expenses are both mixed costs. In Segment B, 70% of MOH is variable and 60% of S&A is variable. If the company eliminates Segment B, then it will save 60% of the segment's fixed costs. (a) Prepare a financial analysis that clearly shows the impact to Company DEF's annual net operating income if it drops Segment B.
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