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XYZ COMPANY P16-24 Continue or discontinue a segment?

P16-24 Continue or discontinue a segment? [LO 2, 3]. Please see attachment for questions.

P16-24 Continue or discontinue a segment? [LO 2, 3]

The segmented income statement for XYZ Company for the year ended December 31, 2010, follows:

XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company Product A Product B Product C
Sales $ 1,200,000 $ 600,000 $ 240,000 $ 360,000
Variable expenses 552,000 300,000 108,000 144,000
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Contribution margin $ 648,000 $ 300,000 $ 132,000 $ 216,000
Fixed expenses $ 564,000 328,000 92,000 144,000
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Operating income $ 84,000 $ (28,000 ) $ 40,000 $ 72,000
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
________________________________________

The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here:

Total
Company Product A Product B Product C
Direct fixed expenses $204,000 $148,000 $20,000 $36,000
________________________________________

The remaining fixed expenses are considered to be corporatewide expenses that have been allocated to each product line based on sales revenue.

Required:
(a) What will be the effect of the decision to discontinue product A on operating income? (Input the amount as positive value. Omit the "$" sign in your response.)

Operating income will by $ for the XYZ Company if it discontinues
Product A.

(b) Assume that product A is discontinued. Prepare a segmented income statement for the remaining products. Allocate corporatewide fixed expenses as described. (Input all amounts as positive values except operating losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company Product B Product C
Sales $
$
$

Variable expenses

________________________________________ ________________________________________ ________________________________________
Contribution margin $
$
$

Direct fixed expenses

Common fixed expenses

________________________________________ ________________________________________ ________________________________________
Operating income/loss $
$
$

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
________________________________________

(c) Starting with the segmented income statement, use the information you discovered during your investigation to present a more appropriately designed segmented income statement. (Input the amount as positive value. Omit the "$" sign in your response.)

XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2010
Total
Company Product A Product B Product C
Sales $
$
$
$

Variable expenses

________________________________________ ________________________________________ ________________________________________ ________________________________________
Contribution margin $
$
$
$

Direct fixed expenses

________________________________________ ________________________________________ ________________________________________ ________________________________________
Segment margin $
$
$
$

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
Common fixed expenses

________________________________________

$

________________________________________________________________________________
________________________________________

Attachments

Solution Summary

Your tutorial to complete this is in Excel (attached). The key is to separate avoidable fixed and common fixed costs.

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