Chapter 15

The president of Ravens Inc. attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year's traditional model income statement be revised, and she received the following report: Division Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Total Company $478,000 259,000 $219,000 169,000 $ 50,000 $186,000 184,000 $82,000 53,000 $ 29,000 $126,000 66,000 $ 60,800 67,000 $ (7,000) $166,000 89.000 $ 77,000 49,000 $ 28,000 The president was told that the fixed expenses of $169,000 included $93,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!" Required: a. Evaluate the president's remark. The president's remark ignores the misleading result of arbitrarily allocated fixed expenses. The president's remark ignores the misleading result of arbitrarily allocated variable expenses. b. Calculate what the company's net income would be if Division B were closed down. Net income without Division B