The president was told that the fixed expenses of $136,000 included $96,000 that between divisions because they were general corporate expenses. After looking a

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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The president of Eaglesway Incorporated 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:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net income (loss)
Total Company
$430,000
252,000
$ 178,000
136,000
$ 42,000
X
$ 170,000
109,000
$ 61,000
45,000
$ 16,000
Division
Y
$ 110,000
62,000
$ 48,000
50,000
$ (2,000)
Z
$ 150,000
81,000
$ 69,000
41,000
$ 28,000
The president was told that the fixed expenses of $136,000 included $96,000 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 Y 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 Y were closed down.
c. What is the policy statement related to the allocation of fixed expenses?
Transcribed Image Text:The president of Eaglesway Incorporated 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: Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Total Company $430,000 252,000 $ 178,000 136,000 $ 42,000 X $ 170,000 109,000 $ 61,000 45,000 $ 16,000 Division Y $ 110,000 62,000 $ 48,000 50,000 $ (2,000) Z $ 150,000 81,000 $ 69,000 41,000 $ 28,000 The president was told that the fixed expenses of $136,000 included $96,000 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 Y 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 Y were closed down. c. What is the policy statement related to the allocation of fixed expenses?
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