Jackson Brothers Instruments sells stringed instruments. Trent Jackson, the companys president, just received the following income statement reporting the results of the past year.

Banjos Guitars Fiddles Total

Sales revenue $1,250,000 $3,600,000 $2,380,000 $7,230,000

Variable cost of goods sold 850,000 2,340,000 1,904,000 5,094,000

Fixed cost of goods sold 115,000 188,000 166,000 469,000

Gross profit 285,000 1,072,000 310,000 1,667,000

Variable operating expenses 170,000 675,000 238,000 1,083,000

Fixed operating expenses 85,000 80,000 83,000 248,000

Common fixed costs 40,000 110,000 77,000 227,000

Operating income $(10,000) $ 207,000 ($88,000) $ 109,000

Trent is concerned that two of the companys divisions are showing a loss, and he wonders if the company should stop selling Banjos and Fiddles to concentrate solely on guitars.

Required

a. Prepare a segment margin income statement. Fixed cost of goods sold and fixed operating expenses can be traced to each division.

b. Should Trent close the banjos and fiddles divisions? Why or why not?

c. Trent wants to change the allocation method used to allocate common fixed costs to the divisions. His plan is to allocate these costs based on sales revenue. Will this new allocation method change your decision on whether to close the guitars and fiddles divisions? Why or why not?