Reference no: EM133184177

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?