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Question - Jackson Brothers Instruments sells stringed instruments. Trent Jackson, the company's president, just received the following income statement reporting the results of the past year.
Banjos
Guitars
Fiddles
Total
Sales revenue
$1,250,000
$3,600,000
$2,380,000
$7,230,000
Variable cost of goods sold
850,000
2,340,000
1,904,000
5,094,000
Fixed cost of goods sold
115,000
188,000
166,000
469,000
Gross profit
285,000
1,072,000
310,000
1,667,000
Variable operating expenses
170,000
675,000
238,000
1,083,000
Fixed operating expenses
85,000
80,000
83,000
248,000
Common fixed costs
40,000
110,000
77,000
227,000
Operating income
$(10,000)
$207,000
($88,000)
$109,000
Trent is concerned that two of the company's divisions are showing a loss, and he wonders if the company should stop selling Banjos and Fiddles to concentrate solely on guitars.
Required -
a. Prepare a segment margin income statement. Fixed cost of goods sold and fixed operating expenses can be traced to each division.
b. Should Trent close the banjos and fiddles divisions? Why or why not?
c. Trent wants to change the allocation method used to allocate common fixed costs to the divisions. His plan is to allocate these costs based on sales revenue. Will this new allocation method change your decision on whether to close the guitars and fiddles divisions? Why or why not?
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