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Elimination of Unprofitable Segment Decision E 9 URL Services has two divisions: Basic Web Pages and Custom Web Pages Ricky Vega manager of Custom Web Pages wants to find out why Custom Web Pages

Elimination of Unprofitable Segment Decision

E 9. URL Services has two divisions: Basic Web Pages and Custom Web Pages. Ricky Vega, manager of Custom Web Pages, wants to find out why Custom Web Pages is not profitable. He has prepared the reports that appear on the next page.

1. How will URL Services be affected if the Custom Web Pages Division is eliminated?

2. How will URL Services be affected if the Design segment of Custom Web Pages is eliminated?

3. What should Ricky Vega do? What additional information would be helpful to him in making the decision?

URL Services

Segmented Income Statement

For the Year Ended December 31

 

Basic

Web Pages (1,000 units)

Custom

Web Pages

(200 units)

Total

Company

Service revenue

$200,000

$ 150,000

$350,000

Less variable costs

 

 

 

Direct professional labor:

 

 

 

Direct professional labor:

$ 32,000

$ 80,000

$112,000

Direct professional labor:

30,000

4,000

34,000

maintain

15,000

36,000

51,000

Total variable costs

$ 77,000

$ 120,000

$197,000

Contribution margin

$123,000

$ 30,000

$153,000

Less direct fixed costs

 

 

 

Depreciation on computer

 

 

 

equipment

$ 6,000

$ 12,000

$ 18,000

Depreciation on servers

10,000

20,000

30,000

Total direct fixed costs

$ 16,000

$ 32,000

$ 48,000

Segment margin

$107,000

($ 2,000)

$105,000

Less common fixed costs

 

 

 

Building rent

 

 

$ 24,000

Supplies

 

 

1,000

Insurance

 

 

3,000

Telephone

 

 

1,500

Website rental

 

 

500

Total common fixed costs

 

 

$ 30,000

Operating income

 

 

$ 75,000

 

Custom Web Pages Division

URL Services

Segment Profitability Decision

Incremental Analysis

 

Design

Install

Maintain

Total

Service revenue

$60,000

$25,000

$65,000

$150,000

Less variable costs

80,000

4,000

36,000

120,000

Contribution margin

($20,000)

$21,000

$29,000

$ 30,000

Less direct fixed costs

6,000

13,000

13,000

32,000

Segment margin

($26,000)

$ 8,000

$16,000

($ 2,000)

Jun 22 2020 View more View Less

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