Segment elimination decision
Lockett Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.
|
LOCKETT COMPANY |
|||
|
Segment |
A |
B |
C |
|
Sales |
$191,000 |
$251,000 |
$347,000 |
|
Cost of goods sold |
(147,000) |
(99,000) |
(200,000) |
|
Sales commissions |
(19,000) |
(36,000) |
(24,000) |
|
Contribution margin |
25,000 |
116,000 |
123,000 |
|
General fixed oper. exp. (allocation of president’s salary) |
(45,000) |
(51,000) |
(46,000) |
|
Advertising expense (specific to individual divisions) |
(4,000) |
(8,000) |
0 |
|
Net income |
($24,000) |
$57,000 |
$77,000 |
Required
a. Explain the effect on profitability if Segment A is eliminated.
b. Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.