Question
Physical Phitness, Inc., operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. "Survival of the fittest, I say!" was his response when the Weak division's manager insisted that his division earned money for the company. Following is the most recent financial analysis for each division: Weak Average Strong Sales Variable expenses Contribution margin 73,100 150,500 234,200 Direct expenses Allocated expenses 52,100 521100 Operating income (16,400) _$23,300 $125,600 $349,200 $543,800 52,500 198,700 309,600 37,400 75,100 117,000 52,100 52,100 Operating income (16,400) $23,300 $65,100 (a) Your answer is correct Prepare a revised income statement showing the segment margin for each division Weak Average Strong Total 125600 $ 349200 Sales 543800 1018600 Variable expense Contribution margin Direct expense 52500 198700 309600 560800 73100 37400 35700S 150500 234200 457800 75100 117000 229500 75400 $ 117200 Segment margin Allocated expense Operating income 228300 156300 72000
Explanation / Answer
Physical Phitness Details Amt $ Total Allocated Expense 156,300 When Weak is dropped it will be allocated equally to Average and Strong Allocated Expense to Average= 78,150 Segment Marging Average= 75,400 Less Allocated Expense (78,150) Operating income/(loss)= (2,750) If Weak is dropped then $78,150 will be allocated to Average , resulting in a $ 2,750 Loss to the division as currently reported.