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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 COMPANYIncome 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.
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