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Explain the effect on profitability if segment a eliminated

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Reference no: EM13977500

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

Income Statements for the Year 2009

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.

Reference no: EM13977500

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