Cost Management
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The management accountant for the Pen Company has prepared the following segmented income statement for each of its three product lines.
Fielder
Total
Sales
$500,000
$350,000
$450,000
$1,300,000
Variable expenses
360,000
260,000
290,000
910,000
Contribution margin
140,000
90,000
160,000
390,000
Other costs
20,000
20,000
20,000
60,000
Segment margin
120,000
70,000
140,000
330,000
Allocated avoidable costs
30,000
30,000
40,000
100,000
Segment income
90,000
40,000
100,000
230,000
Allocated corporate costs
40,000
50,000
40,000
130,000
Corporate profit
$50,000
$(10,000)
$60,000
$100,000
Do you recommend dropping the Zinc product line? Why or why not?
Yes, I would recommend dropping the Zinc product; after preparing the segmented income statement the Zinc products contribution margin, segment margin, and segment income is positive but less when compared to the others. In the end Zinc is not producing an overall profit after allocated corporate costs are subtracted.
If the Haco product line had been discontinued, the short-term effect on corporate profits would be a decrease of what amount?
The short–term effect would be a decrease of $140,000; the contribution margin is an estimate of the immediate affects if a segment is shut-down.
Assume that the Fielder product line has been discontinued and long-term capacity has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of what amount?
The projected long-term effect of shutting down the Fielder segment would be the segmented income of $100,000.
Assume that an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, which product line should receive the advertising dollars? Why?