Truman, Inc. Keep or Drop Division B? Errors in Evaluating.
Not what you're looking for?
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
Total Company A B C
Sales $466,000 $182,000 $122,000 $162,000
Variable expenses 262,000 111,000 64,000 87,000
Contribution
Margin $204,000 $71,000 $58,000 $75,000
Fixed expenses 163,000 51,000 65,000 47,000
Net income (loss) $41,000 $20,000 ($7,000) $28,000
The president was told that the fixed expenses of $163,000 included $90,000 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!"
a. Evaluate the president's remark.
1. The president's remark ignores the misleading result of arbitrarily allocated fixed expenses.
2. The president's remark ignores the misleading results of arbitrarily allocated variable expenses.
b. Calculate what the company's net income would be if Division B were closed down.
c. What is the policy statement related to the allocation of fixed expenses.
1. Never arbitrarily allocate variable expenses.
2. Never arbitrarily allocate fixed expenses.
Purchase this Solution
Solution Summary
Your instructional comments and schedules showing how this works are attached in Excel. Click in cells to see computations.
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Operations Management
This quiz tests a student's knowledge about Operations Management
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.
Lean your Process
This quiz will help you understand the basic concepts of Lean.