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Bapelol Bapelol
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A month 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.
​
​BanjosGuitarsFiddlesTotal
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?
Textbook 
Managerial Accounting

Managerial Accounting


Edition: 4th
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ryan_navarro5ryan_navarro5
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a.
​BanjosGuitarsFiddlesTotal
Sales revenue$1,250,000 $3,600,000$2,380,000 $7,230,000
Less variable expenses​​​
  Cost of goods sold850,000 2,340,000  1,904,000 5,094,000
  Operating expenses    170,000    675,000     238,000  1,083,000
Contribution margin230,000 585,000     238,000 1,053,000
Traceable fixed expenses​​​​
  Cost of goods sold115,000188,000166,000 469,000
  Operating expenses       5,000       80,000       83,000    248,000
Segment margin$     30,000$   317,000($    11,000)336,000
Common fixed costs​​​   227,000
Operating income​​​$  109,000

b. Trent should not close the Banjos Division, since it has a positive segment margin. Closing the Banjos Division will result in a $30,000 decrease in total operating income.
The Fiddles Division generates a negative segment margin, and the company can save $11,000 if it closed. However, the first step is to see if the division can be made profitable.
c. Changing allocation methods will not change the decision on which division to close. Common fixed costs should not be allocated to divisions when making decisions whether to close a division.

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