The president of Eaglesway Inc. attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year’s traditional model income statement be revised, and she received the following report:

The president was told that the fixed expenses of $60,000 included $42,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, “I knew it! Division Y is a drag on the whole company. Close it down!”

Required:
a. Evaluate the president’s remark.
b. Calculate what the company’s net income would be if Division Y were closed down.
c. Write a policy statement related to the allocation of fixed expenses.

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Sales ...... Variable expenses Contribution margin Fixed expenses.. Net income (loss)... Total Company $ 200,000 120,000 $80,000 60,000 $ 20,000 X $80,000 52,000 $28,000 20,000 $ 8,000 Division Y $50,000 30,000 $20,000 22,000 $ (2,000) Z $70,000 38,000 $32,000 18,000 $14,000