Buckley Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eli

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)

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Mít Mít 2 months 2021-07-28T08:15:48+00:00 1 Answers 1 views 0

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    2021-07-28T08:17:28+00:00

    Answer:

    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.

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