Operations of Borderland Oil Drilling Services are separated into two geographical divisions: United States and Mexico. The operating results of each division for 2013 are as follows:

  

      

  

Corporate fixed costs are allocated to the divisions based on relative sales. Assume that all of a division’s direct fixed costs could be avoided by eliminating that division. Because the U.S. division is operating at a loss, Borderland’s president is considering eliminating it.

  

a. If the U.S. division had been eliminated at the beginning of the year, what would have been Borderland’s pre-tax income?

  

b. Recast the income statements into a more meaningful format than the one given. Why would total corporate operating results change from the $108,000 loss to the results determined in (a)?

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United States Mexico Total Sales $7,200,000 (4,740,000) $2,460,000 $3,600,000 (2,088,000) $1,512,000 $10,800,000 (6,828,000) $ 3,972,000 (1,290,000) $ 2,682,000 (2,790,000) $ (108,000) Variable costs Contribution margin Direct fixed costs Segment margin Corporate fixed costs Operating income (loss) (800,000) $ 1,660,000 (1,900,000) $ (240,000) (490,000) $1,022,000 (890,000) $ 132,000 United States Mexico Total Sales $7,200,000 (4,740,000) $2,460,000 $3,600,000 (2,088,000) $1,512,000 $10,800,000 (6,828,000) $ 3,972,000 (1,290,000) $ 2,682,000 (2,790,000) $ (108,000) Variable costs Contribution margin Direct fixed costs Segment margin Corporate fixed costs Operating income (loss) (800,000) $ 1,660,000 (1,900,000) $ (240,000) (490,000) $1,022,000 (890,000) $ 132,000