Question

The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division. Projections for the next year are as follows:
Northern Division Eastern Division Total
Sales $ 750,000 $ 540,000 $ 1,290,000
Less: Variable costs 270,000 300,000 570,000
Contribution margin $ 480,000 $ 240,000 $ 720,000
Less: Direct fixed costs 225,000 190,000 415,000
Segment margin $ 255,000 $ 50,000 $ 305,000
Less: Allocated common costs 130,000 95,000 225,000
Operating income (loss) $ 125,000 $ (45,000 ) $ 80,000
Required:
a. Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be __________.b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Jorge Corporation's operating income be?

Answer 1

Answer:

a. $30,000

b. $126,000

Explanation:

a. Operating income = Northern operating income - Allocated common costs of eastern division

= $125,000 - $95,000

= $30,000

Here, we assume Eastern Division is dropped so we are deducting the allocated common cost from northern operating income.

b.

Sales                                             $750,000

Less: Variable costs                 $270,000

Contribution margin                       $576,000

Less: Direct fixed costs                  $225,000

Segment margin                         $351,000

Less: Allocated common costs $225,000

Operating income                         $126,000

Therefore, if Northern divisions sales will increase by 20% so, we increase the contribution margin by 20%