Question

Buckley Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated. BUCKLEY COMPANY Income Statements for Year 2 Segment A B C Sales $ 330,000 $ 480,000 $ 500,000 Cost of goods sold (242,000 ) (184,000 ) (190,000 ) Sales commissions (30,000 ) (44,000 ) (44,000 ) Contribution margin 58,000 252,000 266,000 General fixed operating expenses (allocation of president's salary) (92,000 ) (92,000 ) (92,000 ) Advertising expense (specific to individual divisions) (6,000 ) (20,000 ) 0 Net income (loss)

Answer 1

relevant costs and expenses for segment A:

Sales revenue $330,000

COGS ($242,000)

Commissions ($30,000)

Contribution margin $58,000

Advertising expense ($6,000)

Relevant Oper. income $52,000

General fixed operating expenses are not relevant since they will occur whether or not segment A continues to operate.

If the company discontinues segment A, then its operating profit will be:

Sales revenue $980,000

COGS ($374,000)

Commissions ($88,000)

Contribution margin $518,000

Fixed oper. expenses ($276,000)

Advertising expense ($20,000)

Operating income $222,000

If the company keeps segment A, then its operating profits will be:

Sales revenue $1,310,000

COGS ($616,000)

Commissions ($118,000)

Contribution margin $576,000

Fixed oper. expenses ($276,000)

Advertising expense ($26,000)

Operating income $274,000

It is better to keep segment A.