HOTEL CATERING INCOME STATEMENT

 

	TOTAL	DIVISION A	DIVISION B	DIVISION C
Sales	$1000 000	$400 000	$250 000	$350 000
Cost of good sold	742 500	300 000	180 000	262 500
Gross margin	257 500	100 000	70 000	87 500
Less operating expenses
Selling	150 000	60 000	22 500	67 500
Administrative	150 000	60 000	37 500	52 500
Total operating expenses	300 000	120 000	60 000	120 000
Net operating income/loss	$(42 500)	$(20 000)	$10 000	$(32 500)
	DIVISION A	DIVISION B	DIVISION C
Variable costs * PRODUCTION (MATERIALS, LABOR, AND VARIABLE OVERHEAD)	20%	30%	25%
VARIABLE SELLING	5%	5%	5%
TRACEABLE FIXED COSTS PRODUCTION	$107 000	$30 000	$63 000
TRACEABLE FIXED COSTS SELLING (SALARIES AND ADVERTISING)	$40 000	$10 000	$50 000

 

* As a percentage of line sales

 

1. Fixed production costs total $500 000 per month. Part of this amount is traceable directly to the product lines, as shown in the tabulation above. The remainder is common to the product lines.

1. All administrative costs are common to the three product lines.

 

 

C) Work in process and finished goods inventories are negligible and can be ignored.

 

D) Line A and B each sell for $100 per unit and line C sells for $80 per unit. Strong market demand exists for all three products.

 

 

REQUIRED

 

1. Prepare a new income statements segmented by product lines, using the contribution approach, show both amounts and %.

 

1. Should we cut back production of Line A? Why or why not?

 

      3) Assume that the company considers the elimination of Line C due to its poor showing. What points would you make for or against elimination of the line.