When MrDing L *These Traceable Expenses Could Be Eliminated If the Product Lines

question 80

Essay

When Mr.Ding L.Berry,president and chief executive of Berry,Inc.,first saw the segmented income statement below,he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!"

$\begin{array}{lcccc}\begin{array}{l}\\\text { Sales }\\\text { Variable expenses }\\\text { Contribution margin } \\\text { Traceable fixed expenses* } \\\text { Common expenses, allocated } \\\text { Operating income (loss) } \end{array}\begin{array}{l}\underline { \text { Total } }\\\$ 250,000\\119,000\\131,000\\=98,000\\32,900\\\$ 100\end{array}\begin{array}{c}\underline { \mathrm { U } } \\\$ 100,000 \\37,500\\63,000\\31,000 \\\$ 18,000 \\\$ 14,000\end{array}\begin{array}{c}\underline { \mathrm { V } }\\\$ 75,000 \\35,000 \\ 40,000 \\37,000 \\10,500 \\\$(7,500)\end{array}\begin{array}{c} \underline { \mathrm { W } } \\\$ 75,000 \\47,000\\28,000 \\30,000 \\\$ 4,400 \\\$(6,400)\end{array}\end{array}$

*These traceable expenses could be eliminated if the product lines to which they are traced were discontinued.

Required:

Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer.

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Definitions:

Novation

The act of replacing an original party in a contract with a new party, with the consent of all involved, effectively creating a new contract.

Previous Valid Obligation

A duty or commitment that has been legally recognized and must be fulfilled as previously agreed or contracted.

Novation

The act of replacing an old obligation with a new one, thereby extinguishing the original obligation.

Consideration

In contract law, the benefit or value that each party agrees to give or receive as part of a legal agreement.