Chapter 12 Full Student Version [Read-Only]

12 11 a contribution margin approach decision rule

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Unformatted text preview: s type of decision. 12-11 A Contribution Margin Approach DECISION RULE Lovell should drop the digital watch segment only if its profit would increase. This would only happen if the fixed cost savings exceed the lost contribution margin. margin. Let’s look at this solution. 12-12 Example: Adding/Dropping Segments Segment Income Statement Digital Watches Sales Less: variable expenses Variable manufacturing costs Variable shipping costs Commissions Contribution margin Less: fixed expenses General factory overhead Salary of line manager Depreciation of equipment Advertising – direct Rent – factory space General admin. expenses Net operating loss $ 500,000 $ 120,000 5,000 75,000 $ 60,000 90,000 50,000 100,000 70,000 30,000 200,000 $ 300,000 400,000 $ (100,000) 12-13 Adding/Dropping Segments 12-14 Adding/Dropping Segments Segment Income Statement Digital Watches Segment Income Statement Digital Watches Sales $ 500,000 Less: variable expenses Variable manufacuring costs $ total fixed general Investigation has revealed that120,000 total Variable shipping costs 5,000 general factory overhead and general Commissions 200,000 not be administrative expenses would 75,000 affected if Contribution margin $ 300,000 the the digital watch line...
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