Eliminate an Unprofitable Segment Cloud busters Aircraft Inc. makes a variety of small airplanes for business and personal use” The Spitfire, the Lightning Bolt, and the Aerobatic. Lately business has been very slow and the Aerobatic has become unprofitable. Consider the income statement data as follows: Spitfire Lightning Bolt Aerobat Total Sales $9,000,000 $8,000,000 $3,500,000 $20,500,000 Variable Expenses 6,200,000 4,200,000 2,600,000 $13,000,000 Contribution Margin 2,800,000 3,800,000 900,000 $7,500,000 Fixed Expenses 1,100,000 1,250,000 1,150,000 $3,500,000 Net Income $1,700,000 $2,550,000 ($250,000) $4,000,000 Additional Fixed Exp. Adjusted Net Income If the Aerobat is eliminated, the fixed expenses will be allocated to the Spitfire and Lightning Bolt at 45% and 55% respectively. Should the company continue to make the Aerobat, or would it be better off discontinuing this line of business? Please explain and show your calculations.
Eliminate an Unprofitable Segment
Cloud busters Aircraft Inc. makes a variety of small airplanes for business and personal use” The Spitfire, the Lightning Bolt, and the Aerobatic. Lately business has been very slow and the Aerobatic has become unprofitable.
Consider the income statement data as follows:
|
|
Spitfire |
Lightning Bolt |
Aerobat |
Total |
|
Sales |
$9,000,000 |
$8,000,000 |
$3,500,000 |
$20,500,000 |
|
Variable Expenses |
6,200,000 |
4,200,000 |
2,600,000 |
$13,000,000 |
|
Contribution Margin |
2,800,000 |
3,800,000 |
900,000 |
$7,500,000 |
|
Fixed Expenses |
1,100,000 |
1,250,000 |
1,150,000 |
$3,500,000 |
|
Net Income |
$1,700,000 |
$2,550,000 |
($250,000) |
$4,000,000 |
|
|
|
|
|
|
|
Additional Fixed Exp. |
|
|
||
| Adjusted Net Income |
|
|
|
If the Aerobat is eliminated, the fixed expenses will be allocated to the Spitfire and Lightning Bolt at 45% and 55% respectively. Should the company continue to make the Aerobat, or would it be better off discontinuing this line of business? Please explain and show your calculations.
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