Exercise 15.15

Segmented income statement 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 years traditional model income statement be revised, and she received the following report:

		Division
	Total Company	A	B	C
Sales	$100,000	$40,000	$25,000	$35,000
Variable expenses	60,000	26,000	15,000	19,000
Contribution margin	$ 40,000	$14,000	$10,000	$16,000
Fixed expenses	30,000	10,000	11,000	9,000
Net income (loss)	$ 10,000	$ 4,000	$(1,000)	$ 7,000

The president was told that the fixed expenses of $30,000 included $21,000 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:

Evaluate the presidents remark.

Calculate what the companys net income would be if Division B were closed down.

Write a policy statement related to the allocation of fixed expenses.