1. Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:

   	Property Insurance		Automobile Insurance
   Sales	$4,200,000		$12,000,000
   Less variable expenses	3,830,000		9,600,000
   Contribution margin	$370,000		$2,400,000
   Less direct fixed expenses	400,000		500,000
   Segment margin	$(30,000)		$1,900,000
   Less common fixed expenses (allocated)	100,000		200,000
   Operating income (loss)	$(130,000)		$1,700,000

   The president of the company is considering dropping the property insurance. However, some policyholders prefer having their property and automobile insurance with the same company, so if property insurance is dropped, sales of automobile insurance will drop by 12 percent. No significant non-unit-level activity costs are incurred.

   Required:

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

   by $

   As a supporting computation, prepare a segmented income statement for the keep-or-drop decision.

   Devern Assurance Company
   Keep-or-Drop For Service Firm
   Segmented Income Statement
   	Keep	Drop
   	$	$
   	$	$
   	$	$

   2. Assume 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 automobile insurance by 8 percent. Prepare a segmented income statement that reflects the effect of increased advertising.

   Devern Assurance Company
   Keep-or-Drop For Service Firm
   Segmented Income Statement
   	Property Insurance	Automobile Insurance	Total
   	$	$	$
   	$	$	$
   	$	$	$
   			$