Task: Prepare income statement
Part: 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.
1. Prepare a revised Income Statement, if department Y is dropped.
2. Prepare a segment income statement if the company does not drop department Y.
What do you recommend management should do? Why?