Reference no: EM132824282

Question - Jan Shumard, president and general manager of Danbury Company, was concerned about the future of one of the company's largest divisions. The division's most recent quarterly income statement follows:

Sales $3,751,500

Less: Cost of goods sold 2,722,400

Gross profit $1,029,100

Less: Selling and administrative expenses 1,100,000

Operating (loss) $(70,900)

Jan is giving serious consideration to shutting down the division because this is the ninth consecutive quarter that it has shown a loss. To help him in his decision, the following additional information has been gathered:

The division produces one product at a selling price of $100 to outside parties. The division sells 50% of its output to another division within the company for $83 per unit (full manufacturing cost plus 25%). The internal price is set by company policy. If the division is shut down, the user division will buy the part externally for $100 per unit.

The fixed overhead assigned per unit is $20. All of these costs would be avoidable if the unit were shut down.

Of the fixed selling and administrative expenses, 30% represent allocated expenses from corporate headquarters. Furthermore, $120,000 of the fixed selling and administrative costs, while directly traced to the unit, belong to the Company's CEO's son; Jan will have to re-assign him. Variable selling expenses are $5 per unit sold for units sold. No variable administrative expenses are incurred.

Required -

A. Prepare a segment margin (or division margin) income statement that more accurately reflects the division's profit performance given the numbers reported originally. (Hint: do not change any of the given numbers, but reformat, splitting fixed costs into direct and common)

B. Using the segment margin income statement in A, now adjust for relevant information given in the facts and create a new segment margin income statement based on relevant numbers. (Hint: be clear to show your work for the adjustments from A to B)

C. Given what you did in B, what is the net effect of dropping the division?