Cost Management

The management accountant for the Pen Company has prepared the following segmented income statement for each of its three product lines.

Haco Zinc Fielder Total

Sales $500,000 $350,000 $450,000 $1,300,000

Variable expenses 360,000 260,000 290,000 910,000

Contribution margin 140,000 90,000 160,000 390,000

Other costs 20,000 20,000 20,000 60,000

Segment margin 120,000 70,000 140,000 330,000

Allocated avoidable costs 30,000 30,000 40,000 100,000

Segment income 90,000 40,000 100,000 230,000

Allocated corporate costs 40,000 50,000 40,000 130,000

Corporate profit $50,000 $(10,000) $60,000 $100,000

* Do you recommend dropping the Zinc product line? Why or why not?

Yes, I would recommend dropping the Zinc product; after preparing the segmented income statement the Zinc product's contribution margin, segment margin, and segment income is positive but less when compared to the others. In the end Zinc is not producing an overall profit after allocated corporate costs are subtracted.

* If the Haco product line had been discontinued, the short-term effect on corporate profits would be a decrease of what amount?

The short--term effect would be a decrease of $140,000; the contribution margin is an estimate of the immediate affects if a segment is shut-down.

* Assume that the Fielder product line has been discontinued and long-term capacity has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of what amount?

The projected long-term effect of shutting down the Fielder segment would be the segmented income of $100,000.

* Assume that an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, which product line should receive the advertising dollars? Why?

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