URL services has two divisions. Basic webpages and custom webpages. Ricky Vega, Custom's manager wants to find out why Custom is not profitable. He has prepared the following reports.
URL Services
Segmented Income Statement
For the year ended December 31
Basic Webpages Custom Webpages Total Company
(1000 units) (200 units)
Basic Revenue $200,000 $150,000 $350,000
Less Variable Costs
Direct professional labor: design $32,000 $80,000 $112,000
Direct professional labor: install 30,000 4,000 34,000
Direct professional labor: maintain 15,000 36,000 51,000
Total Variable Costs $77,000 $120,000 $197,000
Contribution margin $123,000 $30,000 $153,000
Less direct fixed cost
Depreciation on computer equipment $6,000 $12,000 $18,000
Depreciation on servers 10,000 20,000 30,000
Total direct fixed costs $16,000 $32,000 $48,000
Segment margin $107,000 $(2,000) $105,000
Less common fixed costs:
Building rent $24,000
Supplies 1,000
Insurance 3,000
Telephone 1,500
Website rental 500
Total common fixed costs $30,000
Operating income $75,000
URL Services
Custom Webpages Division
Incremental Analysis
Design Install Maintain Total
Service revenue $60,000 $25,000 $65,000 $150,000
LEss cariable costs 80,000 4,000 36,000 120,000
Contribution Margin $(20,000) $21,000 $29,000 $30,000
Less direct fixed costs 6,000 13,000 13,000 32,000
Segment margin $(26,000) $8,000 $16,000 $(2,000)
1. How will URL Services be affected if the Custom Webpages Division is eliminated?
2. How will URL Services be affected if the Design segment of Custom Webpages is eliminated?
3.What should Ricky Vega do? What additional info rmation would be helpful to him in making the decision?