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Management Accounting: prepare a segmented income statement for Pumpkin, Inc.

Prepare income statement

Part B
Pumpkin Inc. has two departments, X and Y. A recent monthly income statement for the company follows:

Department
X Y Total
Sales 3,000,000 2,000,000 5,000,000
Less Variable Costs 1,100,000 900,000 2,000,000
Contribution Margin 1,900,000 1,100,000 3,000,000
Less Fixed Costs 1,300,000 1,200,000 2,500,000
Operating income(loss) 600,000 (100,000) 500,000

An analysis of the total fixed expenses show that 1,000,000 of the fixed expenses
are allocated costs. These fixed expenses are allocated based on percentage of sales revenue.
Management is thinking about dropping Department Y based on the statement above.
a. Prepare a revised Income Statement, if department Y is dropped.
b. Prepare a segment income statement if the company does not drop department Y.
What do you recommend management should do? Why?

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Solution Preview

See attached file with answers.

Department
X % Y % Total
Sales 3,000,000 60.0% 2,000,000 40.0% 5,000,000
Less Variable Costs 1,100,000 900,000 2,000,000
Contribution Margin 1,900,000 1,100,000 3,000,000
Less Fixed Costs 1,300,000 1,200,000 2,500,000
Operating income(loss) 600,000 (100,000) 500,000

a. Revised Income Statement if Department Y is ...

Solution Summary

The solution presents two income statements with commentary on both and a conclusion about whether to keep both departments.

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