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The president of Eaglesway Incorporated attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last years traditional model income statement be revised, and she received the following report:

	Total Company	Division
		X	Y	Z
Sales	$ 424,000	$ 168,000	$ 108,000	$ 148,000
Variable expenses	243,000	101,000	62,000	80,000
Contribution margin	$ 181,000	$ 67,000	$ 46,000	$ 68,000
Fixed expenses	133,000	44,000	49,000	40,000
Net income (loss)	$ 48,000	$ 23,000	$ (3,000)	$ 28,000

The president was told that the fixed expenses of $133,000 included $93,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division Y is a drag on the whole company. Close it down!"

Please Answer

1. Evaluate the president's remark.

Option A: The president's remark ignores the misleading result of arbitrarily allocated fixed expenses.

Option B: The president's remark ignores the misleading result of arbitrarily allocated variable expenses.

2. Calculate what the company's net income would be if Division Y were closed down.

3. What is the policy statement related to the allocation of fixed expenses?

Option A: Never arbitrarily allocate fixed expenses.

Option B: Arbitrarily allocate variable expenses.

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