HOTEL CATERING INCOME STATEMENT TOTAL DIVISION $400 000 300 000 DIVISION B $250 000 180 000 DIVISION C $350 000 262 500 $1000 000 742 500 257 500 100 000 70 000 87 500 Sales Cost of good sold Gross margin Less operating expenses Selling Administrative Total operating expenses Net operating income/loss 60 000 150 000 150 000 300 000 22 500 37 500 60 000 67 500 52 500 120 000 120 000 60 000 $(42 500) $(20 000) $10 000 $(32 500) DIVISION C DIVISION DIVISION B A 20% 30% 25% 5% 5% 5% Variable costs * PRODUCTION (MATERIALS, LABOR, AND VARIABLE OVERHEAD) VARIABLE SELLING TRACEABLE FIXED COSTS PRODUCTION TRACEABLE FIXED COSTS SELLING (SALARIES AND ADVERTISING) $107 000 $30 000 $63 000 $40 000 $10 000 $50 000 * As a percentage of line sales A) Fixed production costs total $500 000 per month. Part of this amount is traceable directly to the product lines, as shown in the tabulation above. The remainder is common to the product lines. B) All administrative costs are common to the three product lines. C) Work in process and finished goods inventories are negligible and can be ignored. D) Line A and B each sell for $100 per unit and line C sells for $80 per unit. Strong market demand exists for all three products. 1) Prepare a new income statements segmented by product lines, using the contribution approach, show both amounts and %. 2) Should we cut back production of Line A? Why or why not? 3) Assume that the company considers the elimination of Line C due to its poor showing. What points would you make for or against elimination of the line