The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here:

Total Company	Product A	Product B	Product C
Direct fixed expenses	$204,000	$148,000	$20,000	$36,000

The remaining fixed expenses are considered to be corporatewide expenses that have been allocated to each product line based on sales revenue.

Required:

(a)	What will be the effect of the decision to discontinue product A on operating income? (Input the amount as positive value. Omit the "$" sign in your response.)

Operating income will by $ for the XYZ Company if it discontinues Product A.

(b)	Assume that product A is discontinued. Prepare a segmented income statement for the remaining products. Allocate corporatewide fixed expenses as described. (Input all amounts as positive values except operating losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010
Total Company	Product B	Product C
Sales	$	$	$
Variable expenses
Contribution margin	$	$	$
Direct fixed expenses
Common fixed expenses
Operating income/loss	$	$	$

(c)	Starting with the segmented income statement, use the information you discovered during your investigation to present a more appropriately designed segmented income statement. (Input the amount as positive value. Omit the "$" sign in your response.)

XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010
Total Company	Product A	Product B	Product C
Sales	$	$	$	$
Variable expenses
Contribution margin	$	$	$	$
Direct fixed expenses
Segment margin	$	$	$	$
Common fixed expenses
$

Expert Answer

ferrari5107 answered this

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SOLUTION

a.	Loss of contribution margin...	$(300,000)
Less direct fixed expenses..	148,000
Decrease in operating income	$(152,000)
Operating income will decrease by $152,000 for the XYZ Company if it discontinues Product A.

b.	XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company	Product A	Product B	Product C
Sales.	$ 600,000	$ -	$240,000	$ 360,000
Variable expenses	252,000	-	108,000	144,000
Contribution margin	$ 348,000	$ -	$ 132,000	$ 216,000
Direct fixed expenses..	56,000	-	20,000	36,000
Common fixed expenses..	360,000	-	144,000*	216,000*
Operating income	$ (68,000)	$ (32,000)	$ (36,000)
* Calculation for allocation of corporate-wide expenses based on sales revenue: Product Y = $240,000 / $600,000 = 40% * $360,000 = $144,000 Product Z = $360,000 / $600,000 = 60% * $360,000 = $216,000 Note: The decrease in operating income for XYZ Company is $152,000, decreasing from an operating income of $84,000 to an operating loss of $(68,000).

c.	XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company	Product A	Product B	Product C
Sales.	$ 1,200,000	$ 600,000	$ 240,000	$ 360,000
Variable expenses	552,000	300,000	108,000	144,000
Contribution margin	$ 648,000	$ 300,000	$ 132,000	$ 216,000
Direct fixed expenses..	204,000	148,000	20,000	36,000
Segment margin..	$ 444,000	$ 152,000	$ 112,000	$ 180,000
Common fixed expenses..	360,000
Operating income	$ 84,000