Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous year: Myrtle Laurel Total $561,600 $337,800 $899,400 177,900 175,500 353,400 383,700 162,300 546,000 285,975 172,425 458,400 $97,725 $(10,125) $ 87,600 Sales Variable Costs Contribution Margin Fixed Costs (allocated) Profit Margin What would Clay's profit margin be if the Laurel division was dropped and all fixed costs are unavoidable? Multiple Choice $97725 profit $87,600 profit $383,700 profit $74,700 loss

Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous year: Myrtle Laurel Total $561,600 $337,800 $899,400 177,900 175,500 353,400 383,700 162,300 546,000 285,975 172,425 458,400 $97,725 $(10,125) $ 87,600 Sales Variable Costs Contribution Margin Fixed Costs (allocated) Profit Margin What would Clay's profit margin be if the Laurel division was dropped and all fixed costs are unavoidable? Multiple Choice $97725 profit $87,600 profit $383,700 profit $74,700 loss

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter7: Variable Costing For Management analysis

Section: Chapter Questions

Problem 16E

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Shannon, Inc., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below: On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the companys vice president of finance. MADGE: The Party Supplies Division is killing us. Its not even covering its own fixed costs. Im beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasnt done much better than the previous divisional manager. BOB: Well, before you get too excited about the situation, perhaps you should evaluate Paulas most recent proposals. She wants to spend 10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by 25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10 percent if the right advertising is doneand done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30 percent. The cost of the lease is 95,000 per quarter. Upon hearing this news, Madge calmed considerably and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confidence in Paulas judgment and abilities. Required: 1. Assuming that Paulas proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division? Prepare a segmented income statement for the next quarter that reflects the implementation of Paulas proposals. Assume that the Cookware Divisions sales increase by 5 percent for the next quarter and that the same cost relationships hold. 2. Suppose that everything materializes as Paula projected except for the 10 percent increase in salesno change in sales revenues takes place. Are the proposals still sound? What if the variable costs are reduced by 40 percent instead of 30 percent with no change in sales?
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