Problem 47

Question

Simon Hinson Company operates two divisions: Gordon and Ronin. A segmented income statement for the company’s most recent year is as follow:




Total Company
Gordon Division
Ronin Division

Sales
$850,000
$250,000
$600,000

Less variable expense
505,000
145,000
360,000

Contribution margin
$345,000
$105,000
$240,000

Less traceable fixed costs
145,000
45,000
100,000

Division segment margin
$200,000
$60,000
$140,000

Less common fixed cost
130,000



Net income
$70,000






Required:

A. If the Gordon Division increased its sales by $85,000 per year, how much would the company’s net income change? Assume that all cost behavior patterns remained constant.

B. Assume that the Ronin Division increased sales by $100,000, the Gorgon Division sales remained the same, and there was no change in fixed costs.

1. Calculate the net income amounts for each division and the total company.

2. Calculate the segment margin ratios before and after these changes and comment on the results. Explain the changes.

C. How do the sales increases and decreases impact divisional contribution marhin ratio and segment margin ratio?