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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

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

$

508,000

$

196,000

$

136,000

$

176,000

Variable expenses

272,000

110,000

68,000

94,000

Contribution margin

$

236,000

$

86,000

$

68,000

$

82,000

Fixed expenses

184,000

58,000

72,000

54,000

Net income (loss)

$

52,000

$

28,000

$

(4,000

)

$

28,000

The president was told that the fixed expenses of $184,000 included $100,500 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!"

a. Evaluate the president's remark.

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.

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