Problem:
Continue or discontinue a segment? The segmented income statement for XYZ Company for the year ended December 31, 2010, follows:
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XYZ COMPANY
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Segmented Income Statement
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For the Year Ended December 31, 2010
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Total
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Company
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Product A
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Product B
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Product C
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Sales
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$1,200,000
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$600,000
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$240,000
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$360,000
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Variable expenses
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552,000
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300,000
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108,000
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144,000
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Contribution margin
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$ 648,000
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$300,000
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$132,000
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$216,000
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Fixed expenses
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564,000
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328,000
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92,000
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144,000
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Operating income
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$ 84,000
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$(28,000)
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$ 40,000
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$ 72,000
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The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here:
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Total
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Company
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Product A
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Product B
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Product C
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Direct fixed expenses
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$204,000
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$148,000
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$20,000
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$36,000
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The remaining fixed expenses are considered to be corporate wide expenses that have been allocated to each product line based on sales revenue.
Required:
a. Prepare a relevant cost analysis for the decision to continue or discontinue product A. Comment on your analysis.
b. Assume that product A is discontinued. Prepare a segmented income statement for the remaining products. Allocate corporate wide fixed expenses as described.
c. Starting with the segmented income statement, use the information you discovered during your investigation to present a more appropriately designed segmented income statement.
d. Explain to the president why the redesigned segmented income statement is more appropriate than the current one.