P16-24 Continue or discontinue a segment? [LO 2, 3]

The segmented income statement for XYZ Company for the year ended December 31, 2010, follows:

XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010
	Total Company			Product A			Product B			Product C
Sales	$	1,200,000		$	600,000		$	240,000		$	360,000
Variable expenses		552,000			300,000			108,000			144,000
Contribution margin	$	648,000		$	300,000		$	132,000		$	216,000
Fixed expenses	$	564,000			328,000			92,000			144,000
Operating income	$	84,000		$	(28,000	)	$	40,000		$	72,000

The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here:

	Total Company	Product A	Product B	Product C
Direct fixed expenses	$204,000	$148,000	$20,000	$36,000

The remaining fixed expenses are considered to be corporatewide expenses that have been allocated to each product line based on sales revenue.

Required:

(a)	What will be the effect of the decision to discontinue product A on operating income? (Input the amount as positive value. Omit the "$" sign in your response.)

Operating income will by $ for the XYZ Company if it discontinues Product A.

(b)	Assume that product A is discontinued. Prepare a segmented income statement for the remaining products. Allocate corporatewide fixed expenses as described. (Input all amounts as positive values except operating losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010
	Total Company	Product B	Product C
Sales	$	$	$
Variable expenses
Contribution margin	$	$	$
Direct fixed expenses
Common fixed expenses
Operating income/loss	$	$	$

(c)	Starting with the segmented income statement, use the information you discovered during your investigation to present a more appropriately designed segmented income statement. (Input the amount as positive value. Omit the "$" sign in your response.)

XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010
	Total Company	Product A	Product B	Product C
Sales	$	$	$	$
Variable expenses
Contribution margin	$	$	$	$
Direct fixed expenses
Segment margin	$	$	$	$
Common fixed expenses
	$