(Product line) Operations of Borderland Oil Drilling Services are separated into two geographical divisions: United States and Mexico. The operating results of each division for 2010 are as follows:
|
United States |
Mexico |
Total |
|
|
Sales |
$7,200,000 |
$3,600,000 |
$10,800,000 |
|
Variable costs |
(4,740,000) |
(2,088,000) |
(6,828,000) |
|
Contribution margin |
$2,460,000 |
$1,512,000 |
$ 3,972,000 |
|
Direct fixed costs |
(800,000) |
(490,000) |
(1,290,000) |
|
Segment margin |
$1,660,000 |
$1,022,000 |
$ 2,682,000 |
|
Corporate fixed costs |
(1,900,000) |
(890,000) |
(2,790,000) |
|
Operating income (loss) |
$ (240,000) |
$ 132,000 |
$ (108,000) |
Corporate fixed costs are allocated to the divisions based on relative sales. Assume that all of a division’s direct fixed costs could be avoided by eliminating that division. Because the U.S. division is operating at a loss, Borderland’s president is considering eliminating it.
a. If the U.S. division had been eliminated at the beginning of the year, what would have been Borderland’s pre tax income?
b. Recast the income statements into a more meaningful format than the one given. Why would total corporate operating results change from the $108,000 loss to the results determined in part (a)?