Reference no: EM132949206

The following partial income statements are for the Southeast and Northwest Divisions of US Games. These two divisions operate in the same industry but in different geographical markets.

                                                      Southeast                      Northwest
Sales                                                $3,000,000                   $3,000,000
Variable CGS                                       (2,400,000)                 (1,000,000)
Variable selling costs                               (250,000)                   (250,000)
Avoidable direct fixed costs                     (400,000)                    (900,000)
Unavoidable direct fixed costs                   (100,000)                  (1,000,000)
Allocated fixed costs                                (300,000)                   (300,000)
Operating income                                   $ (450,000)                  $ (450,000)

Required:

Problem a. Are these two divisions equally unprofitable? Why or why not?

Problem b. Recast the two income statements such that a segment margin is computed for each division. Based on these new income statements, are the divisions equally profitable? Why or why not?

Problem c. What is a plausible explanation for the differences in the cost structures of the two divisions?

Problem d. Is it possible that one of these divisions is more likely than the other to be dropped in the short run? Explain.