Question
Sheridan, Inc. operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants
Sheridan, Inc. operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. Survival of the fittest, I say! was his response when the Weak divisions manager, insisted Steven, that his division earned money for the company. Following is the most recent financial analysis for each division:
Weak | Average | Strong | ||||||
---|---|---|---|---|---|---|---|---|
Sales revenue | $ 128,000 | $ 453,500 | $ 538,400 | |||||
Variable expenses | 51,900 | 246,700 | 306,200 | |||||
Contribution margin | 76,100 | 206,800 | 232,200 | |||||
Direct expenses | 33,700 | 75,500 | 110,200 | |||||
Allocated expenses | 70,400 |
| 70,400 | 70,400 | ||||
Operating income | $( 28,000) | $ 60,900 | $ 51,600 |
a)Prepare a revised income statement showing the segment margin for each division.
Weak | Average | Strong | Total | |
Sales | $ | $ | $ | $ |
Variable Expense | $ | $ | $ | $ |
Contribution Margin | $ | $ | $ | $ |
Direct Expense | $ | $ | $ | $ |
Segment margin | $ | $ | $ | $ |
Allocated Expense | - | - | - | $ |
Operating Income | - | - | - | $ |
b)By how much would total income change if the Weak division were dropped? Total Income will increase/decrease by $
c) Based on the way allocated expenses are divided among the divisions, what do you think will happen to the Average division if the company continues to prepare financial statements in this way, assuming Weak was dropped? If Weak is dropped, then Average will report allocated expenses of $________, resulting in an operating income/operating loss of $_______ for the division
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