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

The president was told that the fixed expenses of $120,000 included $84,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, €œI knew it! Division B is a drag on the whole company. Close it down!€
Required:
a. Evaluate the president€™s remark.
b. Calculate what the company€™s net income would be if Division B were closed down.
c. Write a policy statement related to the allocation of fixedexpenses.

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Division Total Company $400,000 240,000 ...$160,000 Sales. Contribution margin.. Fixed expenses Net income (loss)..--.... $160,000 104,000 $ 56,000 40,000 $ 16,000 $100,000 60,000 $40,000 44,000 $ (4,000) $140,000 76,000 64,000 36,000 28,000 120,000 40,000