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) The divisions are not equally profitable As evidenced above Northwest has a much larger amount of unavoidable fixed costs 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) 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) Segment Margin $50,000 $850,000 Both companies have the same costs and sales, however Southeast has a much higher variable CGS, which accounts for 80 of its sales Therefore only 20 is available to cover variable and avoiding selling costs Northwest has a higher avoidable fixed cost that accounts for 30 of sales and variable CGS accounts for 33 in sales making Northwest more profitable c What is a plausible explanation for the differences in the cost structures of the two divisions (3 marks) Southeast probably relies on human labour for its products, as direct labour is part of the Variable CGS, which may explain why Southwest has such a high variable CGS 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) Yes, the company would do well in losing Southwest since this segment can barely support its own operation As stated above southwest has $50,000 in losses as a result of its own operation, which is an overall loss for the company as a whole 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)

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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

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) The divisions are not equally profitable. As evidenced above Northwest has a much larger amount of unavoidable fixed costs.
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) 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) ========== ======= Segment Margin $50,000 $850,000 Both companies have the same costs and sales, however Southeast has a much higher variable CGS, which accounts for 80% of its sales. Therefore only 20% is available to cover variable and avoiding selling costs. Northwest has a higher avoidable fixed cost that accounts for 30% of sales and variable CGS accounts for 33% in sales making Northwest more profitable.
c.	What is a plausible explanation for the differences in the cost structures of the two divisions? (3 marks) Southeast probably relies on human labour for its products, as direct labour is part of the Variable CGS, which may explain why Southwest has such a high variable CGS.
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) Yes, the company would do well in losing Southwest since this segment can barely support its own operation. As stated above southwest has $50,000 in losses as a result of its own operation, which is an overall loss for the company as a whole.

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)