The president of Ravens Inc. attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last years traditional model income statement be revised, and she received the following report:

							Division
		Total Company				A				B				C
Sales		$	466,000			$	182,000			$	122,000			$	162,000
Variable expenses			262,000				111,000				64,000				87,000
Contribution margin		$	204,000			$	71,000			$	58,000			$	75,000
Fixed expenses			163,000				51,000				65,000				47,000
Net income (loss)		$	41,000			$	20,000			$	(7,000	)		$	28,000

The president was told that the fixed expenses of $163,000 included $90,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!" Required: a. Evaluate the president's remark.

multiple choice 1

• The president's remark ignores the misleading result of arbitrarily allocated fixed expenses.

• The president's remark ignores the misleading result of arbitrarily allocated variable expenses.

b. Calculate what the company's net income would be if Division B were closed down.

c. What is the policy statement related to the allocation of fixed expenses.

multiple choice 2

• Never arbitrarily allocate fixed expenses.

• Never arbitrarily allocate variable expenses.