Indicate the amount of income that would be increased or decreased, if the Company drops property insurance and provide supporting computations.

Question

Devern Assurance Company provides both property and automobile insurance. The projectedincome statements for the two products are as follows: The president of the company is considering dropping the property insurance. However, somepolicyholders 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 percent. No sig-nificant non-unit-level activity costs are incurred. Required:1. If Devern Assurance Company drops property insurance, by how much will income increaseor decrease? Provide supporting computations. 2. Assume that dropping all advertising for the property insurance line and increasing the cor-porate advertising budget by $450,000 will increase sales of property insurance by 10 percent and automobile insurance by 8 percent. Prepare a segmented income statement that reflectsthe effect of increased advertising. Should advertising be increased?

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Chapter 17, Problem 24P

1.

To determine

Indicate the amount of income that would be increased or decreased, if the Company drops property insurance and provide supporting computations.

2.

To determine

Prepare a segmented income statement of D for the given situation and describe whether the advertising should be increased.

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