Management_Accounting

|12-56 |(a) | |Product Line | | | | | | |1 | |2 | |3 | |Total | | | |Revenue |$7,160,000 | |$1,900,000 | |$4,200,000 | |$13,260,000 | | | |Variable costs |4,296,000 | | 950,000 | |1,680,000 | | 6,926,000 | | | |Contribution margin |2,864,000 | |950,000 | |2,520,000 | |6,334,000 | | | |Other costs | 859,200 | | 237,500 | | 693,000 | | 1,789,700 | | | |Segment margin |2,004,800 | |712,500 | |1,827,000 | |4,544,300 | | | |Allocated avoidable | | | | | | | | | | | costs | 349,000 | | 156,000 | | 698,000 | | 1,203,000 | | | |Income |$1,655,800 | |$556,500 | |$1,129,000 | |$3,341,300 | | | |Unallocated costs | | | | | | | 801,300 | | | |Company profit | | | | | | |$2,540,000 | | | | | | | | | | | | (b) The common interpretation is that the segment margin is the stand-alone profit of each segment, or the financial effect on the organization if the segment is eliminated after the fixed capacity used by the segment is either redeployed or sold off. Beyond issues relating to the allocation of joint costs and revenues, the major problem with this interpretation is the effects that the segments have on each other. For example, in a financial institution, the need for checking accounts may draw customers to the institution; if the financial institution does not offer checking accounts, customers may take all their business elsewhere. As another example, consider the role of a restaurant in a large hotel. On the surface, restaurants are money losers. However, eliminating a restaurant would likely have a negative effect on room occupancy, particularly if the hotel is a convention hotel. This question provides an opportunity to discuss these interpretational issues and possible interdivisional externalities in organizations.