Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows: Property Insurance Automobile Insurance Sales $ 4,200,000 $ 12,000,000 Less: Variable Expenses 3,830,000 9,600,000 Contribution Margin 370,000 2,400,000 Less: direct fixed expenses (including individual line advertising) 400,000 500,000 Segment Margin (30,000) 1,900,000 Less: common fixed expenses (including corporate advertising) 100,000 200,000 Operating Income (130,000) 1,700,000 The president of the company is considering dropping the property insurance. However, some policyholders prefer having their property and automobile insurance with the same company; so, if property insurance is dropped, sales of automobile insurance will drop by 12 per cent. No significant non-unit-level activity costs are incurred. Required: If Devern Assurance Company drops property insurance, by how much will income increase or decrease? Provide supporting computations. In another situation, assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 per cent and automobile insurance by 8 per cent. Prepare a segmented income statement that reflects the effect of increased advertising.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:

	Property Insurance	Automobile Insurance
Sales	$ 4,200,000	$ 12,000,000
Less: Variable Expenses	3,830,000	9,600,000
Contribution Margin	370,000	2,400,000
Less: direct fixed expenses (including individual line advertising)	400,000	500,000
Segment Margin	(30,000)	1,900,000
Less: common fixed expenses (including corporate advertising)	100,000	200,000
Operating Income	(130,000)	1,700,000

The president of the company is considering dropping the property insurance. However, some policyholders prefer having their property and automobile insurance with the same company; so, if property insurance is dropped, sales of automobile insurance will drop by 12 per cent. No significant non-unit-level activity costs are incurred.

Required:

If Devern Assurance Company drops property insurance, by how much will income increase or decrease? Provide supporting computations.
In another situation, assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 per cent and automobile insurance by 8 per cent. Prepare a segmented income statement that reflects the effect of increased advertising.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Discontinuing operations for a product or a service line

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions