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Posts: 122
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A year ago
Jackson Brothers Instruments sells stringed instruments. Trent Jackson, the company's president, just received the following income statement reporting the results of the past year. | | Banjos | Guitars | Fiddles | Total | | Sales revenue | $1,250,000 | $3,600,000 | $2,380,000 | $7,230,000 | | Variable cost of goods sold | 850,000 | 2,340,000 | 1,904,000 | 5,094,000 | | Fixed cost of goods sold | 115,000 | 188,000 | 166,000 | 469,000 | | Gross profit | 285,000 | 1,072,000 | 310,000 | 1,667,000 | | Variable operating expenses | 170,000 | 675,000 | 238,000 | 1,083,000 | | Fixed operating expenses | 85,000 | 80,000 | 83,000 | 248,000 | | Common fixed costs | 40,000 | 110,000 | 77,000 | 227,000 | | Operating income | $ (10,000) | $ 207,000 | ($ 88,000) | $ 109,000 |
Trent is concerned that two of the company's divisions are showing a loss, and he wonders if the company should stop selling Banjos and Fiddles to concentrate solely on guitars. Required: | a. | Prepare a segment margin income statement. Omit the heading. Fixed cost of goods |
sold and fixed operating expenses can be traced to each division. | b. | Should Trent close the banjos and fiddles divisions? Why or why not? |
| c. | Trent wants to change the allocation method used to allocate common fixed costs to |
the divisions. His plan is to allocate these costs based on sales revenue. Will this new allocation method change your decision on whether to close the guitars and fiddles divisions? Why or why not?
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