Problem 18.36 Segmented Income Statements, Adding and Dropping Product Lines

Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows:

sales	$4,590,000
less:variable expenses	3,953,450
contribution margin	$636,550
less:direct fixed expenses	675,000
divisional margin	$(38,450)
less:common fixed expenses	200,000
divisional profit (loss)	$(238,450)

Upon arrival at the division, Dantrell requested the following data on the divisions three products:

	product A	product B	product C
sales (units)	12,000	14,500	10,000
unit selling price	$150,000	$120,000	$70,000
unit variable costs	$100.00	$83.00	$107.00
direct fixed costs	$100,000	$425,000	$250,000

He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows:

Unit selling price $80

unit variable costs 30

direct fixed costs 240,000

1. Prepare segmented income statements for Products A, B, and C. Enter your answers in thousands rounded to the nearest cent.

2. Assume that Dantrell decides to produce products A and D for the coming year. Prepare the segmented income statements (in thousands) for these two products. Enter your answers in thousands.

3. By how much will profits improve given the combination assumed above? Enter your answer in dollars