1. Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis

   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?

   IncreaseDecrease

   by $fill in the blank 83d745010fc4f88_2

   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
   Contribution marginDirect fixed expensesSalesSegment marginVariable expenses	$- Select -	$- Select -
   Less contribution marginLess direct fixed expensesLess salesLess segment marginLess variable expenses	- Select -	- Select -
   Contribution marginDirect fixed expensesSalesSegment marginVariable expenses	$- Select -	$- Select -
   Less contribution marginLess direct fixed expensesLess salesLess segment marginLess variable expenses	- Select -	- Select -
   Contribution marginDirect fixed expensesSalesSegment marginVariable expenses	$- Select -	$- Select -

   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
   Common fixed costsContribution marginDirect fixed expensesOperating incomeSalesSegment marginVariable costs	$- Select -	$- Select -	$- Select -
   Less common fixed costsLess contribution marginLess direct fixed expensesLess operating incomeLess salesLess segment marginLess variable costs	- Select -	- Select -	- Select -
   Common fixed costsContribution marginDirect fixed expensesOperating incomeSalesSegment marginVariable costs	$- Select -	$- Select -	$- Select -
   Less common fixed costsLess contribution marginLess direct fixed expensesLess operating incomeLess salesLess segment marginLess variable costs	- Select -	- Select -	- Select -
   Common fixed costsContribution marginDirect fixed expensesOperating incomeSalesSegment marginVariable costs	$- Select -	$- Select -	$- Select -
   Less common fixed costsLess contribution marginLess direct fixed expensesLess operating incomeLess salesLess segment marginLess variable costs			- Select -
   Operating incomeOperating loss			$- Select -

   Should advertising be increased?

   YesNo