Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:   Property Insurance Automobile Insurance Sales $ 4,200,000 $ 12,000,000  Less: Variable Expenses 3,830,000 9,600,000                Contribution Margin 370,000 2,400,000 Less: direct fixed expenses (including individual line advertising) 400,000 500,000                Segment Margin (30,000) 1,900,000 Less: common fixed expenses (including corporate advertising) 100,000 200,000                Operating Income (130,000) 1,700,000   The president of the company is considering dropping the property insurance.  However, some policyholders prefer having their property and automobile insurance with the same company; so, if property insurance is dropped, sales of automobile insurance will drop by 12 per cent.  No significant non-unit-level activity costs are incurred.   Required: If Devern Assurance Company drops property insurance, by how much will income increase or decrease?  Provide supporting computations. In another situation, assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 per cent and automobile insurance by 8 per cent. Prepare a segmented income statement that reflects the effect of increased advertising.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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  1. Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:

 

Property Insurance

Automobile Insurance

Sales

$ 4,200,000

$ 12,000,000

 Less: Variable Expenses

3,830,000

9,600,000

               Contribution Margin

370,000

2,400,000

Less: direct fixed expenses (including individual line advertising)

400,000

500,000

               Segment Margin

(30,000)

1,900,000

Less: common fixed expenses (including corporate advertising)

100,000

200,000

               Operating Income

(130,000)

1,700,000

 

The president of the company is considering dropping the property insurance.  However, some policyholders prefer having their property and automobile insurance with the same company; so, if property insurance is dropped, sales of automobile insurance will drop by 12 per cent.  No significant non-unit-level activity costs are incurred.

 

Required:

  1. If Devern Assurance Company drops property insurance, by how much will income increase or decrease?  Provide supporting computations.
  2. In another situation, assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 per cent and automobile insurance by 8 per cent. Prepare a segmented income statement that reflects the effect of increased advertising. 
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