SEGMENTED INCOME STATEMENTS, ADDING AND DROPPING PRODUCT LINES

Louise Bordner has just been appointed manager of Palmroy’s Glass Products Division. She has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Louise will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows:

Sales	$5,350,000
Less: Variable expenses	4,750,000
Contribution margin	$ 600,000
Less: Direct fixed expenses	750,000
Divisional margin	$ (150,000)
Less: Common fixed expenses (allocated)	200,000
Divisional profit (loss)	$ (350,000)

Upon arriving at the division, Louise requested the following data on the division’s three products:

Â	Product A	Product B	Product C
Sales (units)	10,000	20,000	15,000
Unit selling price	$150.00	$140.00	$70.00
Unit variable cost	$100.00	$110.00	$103.33
Direct fixed costs	$100,000.00	$500,000.00	$150,000.00

She also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows:

Unit selling price	$ 70
Unit variable cost	30
Direct fixed costs	640,000

Required:

1. Prepare segmented income statements for Products A, B, and C.

2. Determine the products that Louise should produce for the coming year. Prepare segmented income statements that prove your combination is the best for the division. By how much will profits improve given the combination that you selected?