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Segmented income statement The president of Truman, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year's traditional model income statement be revised, and she received the following report:
Division Company
Total
A
B
C
Sales
$400,000
$160,000
$100,000
$140,000
Variable expenses
240,000
104,000
60,000
76,000
Contribution margin
$ 56,000
$ 40,000
$ 64,000
Fixed expenses
120,000
40,000
44,000
36,000
Net income (loss)
$ 16,000
$ (4,000)
$ 28,000
The president was told that the fixed expenses of $120,000 included $84,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!"
Required:
a. Evaluate the president's remark.
b. Calculate what the company's net income would be if Division B were closed down.
c. Write a policy statement related to the allocation of fixed expenses.
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