Segment elimination decision
Lockett Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.
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LOCKETT COMPANY
Income Statements for the Year 2009
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Segment
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A
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B
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C
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Sales
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$191,000
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$251,000
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$347,000
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Cost of goods sold
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(147,000)
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(99,000)
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(200,000)
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Sales commissions
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(19,000)
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(36,000)
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(24,000)
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Contribution margin
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25,000
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116,000
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123,000
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General fixed oper. exp. (allocation of president's salary)
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(45,000)
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(51,000)
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(46,000)
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Advertising expense (specific to individual divisions)
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(4,000)
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(8,000)
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0
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Net income
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($24,000)
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$57,000
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$77,000
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Required
a. Explain the effect on profitability if Segment A is eliminated.
b. Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.