Devern Assurance Company provides both property and auto incurance. Here are the projected income statements.

The president of the company wants to drop property incsurance. Some policyholders like having their property and auto insurance with the same company, so if the property insurance is dropped, sales of auto insurance will drop by 12 percent. No significant non-unit level activity cost are incurred.

1. If Devern drops propert insurance, how much will income increase or decrease by?

2. Prepare a segmented income statement for the keep-or-drop section

3. Assuming that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 percent and auto insurance by 8 percent. Prepare a segemented income statement that reflects the effect of increased advertising.

Property Insurance Automobile Insurance Sales Less variable expenses $4,200,000 $12,000,000 9,600,000 $ 370,000 2,400,000 500,000 (30,000 1900,000 200,000 S (130,000) 1,700,000 3,830,000 400,000 100,000 Contribution margin Less direct fixed expenses Segment margin Less common fixed expenses (allocated) Operating income (loss)