Reference no: EM13826911
Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis
Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:
Property Insurance Automobile Insurance
Sales $4,200,000 $12,000,000
Less Variable Expenses 3,830,000 9,600,000
Contribution Margin $370,000 $2,400,000
Less Direct Fixed Expenses 400,000 500,000
Segment Margin $ (30,000) $1,900,000
Less Common Fixed Expenses 100,000 200,000
Operating Income (Loss) $ (130,000) $1,700,000
The president of the company is considering dropping the property insurance. However, some policyholders prefer having their property and automobile insurance with the same company, so if property insurance is dropped, sales of automobile insurance will drop by 12 percent. No significant non-unit-level activity costs are incurred.
1. As a supporting computation, prepare a segmented income statement for the keep-or-drop decision.
2. Assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 percent and automobile insurance by 8 percent. Prepare a segmented income statement that reflects the effect of increased advertising.
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