Segment elimination decision
SuperClassSegment elimination decision
Lockett Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.
LOCKETT COMPANY | |||
Segment | A | B | C |
Sales | $191,000 | $251,000 | $347,000 |
Cost of goods sold | (147,000) | (99,000) | (200,000) |
Sales commissions | (19,000) | (36,000) | (24,000) |
Contribution margin | 25,000 | 116,000 | 123,000 |
General fixed oper. exp. (allocation of president’s salary) | (45,000) | (51,000) | (46,000) |
Advertising expense (specific to individual divisions) | (4,000) | (8,000) | 0 |
Net income | ($24,000) | $57,000 | $77,000 |
Required
a. Explain the effect on profitability if Segment A is eliminated.
b. Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.
- 8 years ago
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- segment_elimination_decision.rtf