Problem 2.37
1.
Alydar, Inc.
Income Statement
Sales
Cost of goods sold
Gross profit
Direct division expenses
Division profit
Corporate expenses
Operating income
Eastern
Southern International
$3,150,000 $987,000 $6,500,000
1,580,000 680,000
4,100,000
$1,570,000 $307,000 $2,400,000
337,000 280,000
620,000
$1,233,000
$ 27,000 $1,780,000
Total
$10,637,000
6,360,000
$ 4,277,000
1,237,000
$ 3,040,000
585,000
$ 2,455,000
2.The International Division is the most profitable division and has the highest
sales. This year’s income statement could be compared with those of the past
few years to see if there is a trend upward in international sales. This could be a
division to emphasize in the coming years.
Problem 2.38
1.
Operating income:
Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income
*Variable expenses:
Commissions on first-year policies
(0.55 × 0.65 × $10,000,000)
Commissions on second-year policies
(0.20 × 0.25 × $10,000,000)
Commissions on third-year policies
(0.05 × 0.10 × $10,000,000)
Payout on claims (0.5 × $10,000,000)
Total variable expenses
$10,000,000
9,125,000
$ 875,000
950,000
$ (75,000)
$3,575,000
500,000
50,000
5,000,000
$9,125,000
2.
Plan 1:
Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income
$10,000,000
8,225,000
$ 1,775,000
1,200,000
$ 575,000
*Variable expenses:
Commissions on first-year policies
$2,750,000
(0.55 × 0.50 × $10,000,000
Commissions on second-year policies
(0.20 × 0.15 × $10,000,000)
300,000
Commissions on third-year policies
(0.05 × 0.35 × $10,000,000)
175,000
Payout on claims (0.5 × $10,000,000)
5,000,000
Total variable expenses
$8,225,000
Plan 1 increases segment income by $650,000 ($575,000 + $75,000).
3.
Plan 2:
Sales
Less: Variable expenses*
Contribution margin
Less:
Original fixed expenses
Added administrative expenses
Added advertising expense
Operating income
*Consists only of payout on claims; no commissions are paid.
$7,000,000
3,500,000
$3,500,000
(950,000)
(1,200,000)
(1,000,000)
$ 350,000
Plan 2 increases segment income by $425,000 ($350,000 + $75,000) over the
original segment income. However, Plan 1 is more profitable than Plan 2.