Sedanos Supermarket has prepared the following segmented income statement for three of its departments in its flagship store in late 2006. Agustin Herrn is contemplating dropping the magazines and selling (not eliminating) the pharmacy business to Navarro Discount Pharmacies. He sees that those two departments are losing money and the bread department is only marginally profitable and may be able to do better if he could expand the space into the space now occupied by the magazine dept. Corporate costs are allocated equally among all departments.

Bread Magazines Pharmacy Total

Sales $350,000 $120,000 $350,000 $820,000

Variable expenses 220,000 95,000 290,000 605,000

Contribution margin 130,000 25,000 60,000 215,000

Other costs 60,000 10,000 65,000 135,000

Segment margin 70,000 15,000 (5,000) 80,000

Allocated avoidable costs 18,000 10,000 20,000 48,000

Segment income 52,000 5,000 (25,000) 32,000

Allocated corporate costs 50,000 50,000 50,000 150,000

Corporate profit $ 2,000 $(45,000) ($75,000) ($118,000)

1. Prepare a more useful and understandable segmented income statement for Sr. Herrn.

2. Based on your segmented income statement, should Sr. Herrn drop the magazine department? Why or why not?

3. Based on your segmented income statement, should Sr. Herrn sell the pharmacy? Why or why not?