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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 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?
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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 |
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|
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) |
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