Shannon, Inc., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below:

		Party Supplies Division			Cookware Division			Total
Sales		$500,000			$750,000			$1,250,000
Less: Variable expenses		425,000			460,000			885,000
Contribution margin		$ 75,000			$290,000			$ 365,000
Less: Direct fixed expenses		85,000			110,000			195,000
Segment margin		$ (10,000)			$180,000			$ 170,000
Less: Common fixed expenses								130,000
Operating income								$ 40,000

On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the company's vice president of finance.

MADGE: "The Party Supplies Division is killing us. It's not even covering its own fixed costs. I'm beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasn't done much better than the previous divisional manager."

BOB: "Well, before you get too excited about the situation, perhaps you should evaluate Paula's most recent proposals. She wants to spend $10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by $25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10 percent if the right advertising is doneand done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30 percent. The cost of the lease is $95,000 per quarter."

Upon hearing this news, Madge calmed considerably and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confidence in Paulas judgment and abilities.

1. Assuming that Paula's proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division?

Yes because it will increase the segment margin of the Party Supplies Division by $fill in the blank?

2. Prepare a segmented income statement for the next quarter that reflects the implementation of Paula's proposals. Assume that the Cookware Division's sales increase by 5 percent for the next quarter and that the same cost relationships hold. In your computations, do not round percentages used when revising the revenues and expenses.

	Party Supplies Division	Cookware Division	Total
Sales
Less: Variable Expenses
Contribution margin
Less: Direct fixed expenses
Segment margin
Less: Common fixed expenses
Net income

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