Required:

Compute the total advantage or disadvantage of using the new machine instead of the old

machine over the next four years. Assume that neither machine will have any salvage value at

the end of four years. (

5 marks

)

4.

The following partial income statements are for the Southeast and Northwest Divisions of US

Games. These two divisions operate in the same industry but in different geographical

markets.

Southeast

Northwest

Sales

$3,000,000

$3,000,000

Variable CGS

(2,400,000)

(1,000,000)

Variable selling costs

(250,000)

(250,000)

Avoidable direct fixed costs

(400,000)

(900,000)

Unavoidable direct fixed costs

(100,000)

(1,000,000)

Allocated fixed costs

(300,000

)

(300,000

)

Operating income

$ (450,000)

$ (450,000)

========== =======

Required:

a.

Are these two divisions equally unprofitable? Why or why not? (3 marks)

b.

Recast the two income statements such that a segment margin is computed for

each division. Based on these new income statements, are the divisions equally

profitable? Why or why not? (4 marks)

c.

What is a plausible explanation for the differences in the cost structures of the

two divisions? (3 marks)

d.

Is it possible that one of these divisions is more likely than the other to be

dropped in the short run? Explain. (3 marks