Keep or Drop for Service Firm, Complementary Effects, Traditional Analysis Devern Assurance Company provides both property and automobile insurance The projected income statements for the two products are as follows Property Insurance Automobile Insurance Sales $ 4 , 2 0 0 , 0 0 0 $ 1 2 , 0 0 0 , 0 0 0 Less variable expenses 3 , 8 3 0 , 0 0 0 9 , 6 0 0 , 0 0 0 Contribution margin $ 3 7 0 , 0 0 0 $ 2 , 4 0 0 , 0 0 0 Less direct fixed expenses 4 0 0 , 0 0 0 5 0 0 , 0 0 0 Segment margin $ ( 3 0 , 0 0 0 ) $ 1 , 9 0 0 , 0 0 0 Less common fixed expenses ( allocated ) 1 0 0 , 0 0 0 2 0 0 , 0 0 0 Operating income ( loss ) $ ( 1 3 0 , 0 0 0 ) $ 1 , 7 0 0 , 0 0 0 The president of the company is considering dropping the property insurance However, some policyholders prefer having their property and automobile insurance with the same company, so if property insurance is dropped, sales of automobile insurance will drop by 1 2 percent No significant non unit level activity costs are incurred Required Question Content Area 1 If Devern Assurance Company drops property insurance, by how much will income increase or decrease by $fill in the blank 8 9 fe 3 b 0 5 0 f 8 6 f 8 0 2 Question Content Area As a supporting computation, prepare a segmented income statement for the keep or drop decision Devern Assurance Company Keep or Drop For Service Firm Segmented Income Statement Keep Drop $ Select $ Select Select Select $ Select $ Select Select Select $ Select $ Select Question Content Area 2 Assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $ 4 5 0 , 0 0 0 will increase sales of property insurance by 1 0 percent and automobile insurance by 8 percent Prepare a segmented income statement that reflects the effect of increased advertising If an amount is zero, enter 0 Devern Assurance Company Keep or Drop For Service Firm Segmented Income Statement Property Insurance Automobile Insurance Total $ Select $ Select $ Select Select Select Select $ Select $ Select $ Select Select Select Select $ Select $ Select $ Select Select $ Select Question Content Area Should advertising be increased

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Question: Keep - or - Drop for Service Firm, Complementary Effects, Traditional Analysis Devern Assurance Company provides both property and automobile insurance. The projected income statements

Keep

-

-

Drop for Service Firm, Complementary Effects, Traditional Analysis

Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:

Property

Insurance Automobile

Insurance

Sales $

4, 200, 000

12, 000, 000

Less variable expenses

3, 830, 000 9, 600, 000

Contribution margin $

370, 000

2, 400, 000

Less direct fixed expenses

400, 000 500, 000

Segment margin $

(30, 000)

1, 900, 000

Less common fixed expenses

(

allocated

) 100, 000 200, 000

Operating income

(

loss

)

(130, 000)

1, 700, 000

The president of the company is considering dropping the property insurance. However, some policyholders prefer having their property and automobile insurance with the same company, so if property insurance is dropped, sales of automobile insurance will drop by

12

percent. No significant non

-

unit

-

level activity costs are incurred.

Required:

Question Content Area

1 .

If Devern Assurance Company drops property insurance, by how much will income increase or decrease?

by $fill in the blank

89

3

050

86

80_2

Question Content Area

As a supporting computation, prepare a segmented income statement for the keep

-

-

drop decision.

Devern Assurance Company

Keep

-

-

Drop For Service Firm

Segmented Income Statement

Keep Drop

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Select

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Question Content Area

2 .

Assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $

450, 000

will increase sales of property insurance by

10

percent and automobile insurance by

8

percent. Prepare a segmented income statement that reflects the effect of increased advertising. If an amount is zero, enter

" 0 " .

Devern Assurance Company

Keep

-

-

Drop For Service Firm

Segmented Income Statement

Property Insurance Automobile Insurance Total

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Question Content Area

Should advertising be increased?

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