Question

The president of Ravens Inc. attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year’s traditional model income statement be revised, and she received the following report: Division Total Company A B C Sales $ 484,000 $ 188,000 $ 128,000 $ 168,000 Variable expenses 268,000 112,000 66,000 90,000 Contribution margin $ 216,000 $ 76,000 $ 62,000 $ 78,000 Fixed expenses 172,000 54,000 68,000 50,000 Net income (loss) $ 44,000 $ 22,000 $ (6,000 ) $ 28,000 The president was told that the fixed expenses of $172,000 included $94,500 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!"
Evaluate the President's remark.

Answer 1

Answer and Explanation:

a. The president remark in case of the allocated fixed expenses should be ignored the misleading result as it is seen that the division B has suffered a loss of $6,000 due to which the president exclaimed  "I knew it!.

Moreover the president ignored the given information i.e $172,000 included $94,500 that had been split evenly between divisions as they are classified as a general corporate expenses

So if it is split evenly the general corporate expenses for division B is $31,500 which is come from by dividing the $94,500 from 3 divisions

And if we do not allocated the expenses so all divisions would come in profit