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

Division
Total Company A B C
Sales $ 520,000 $ 200,000 $ 140,000 $ 180,000
Variable expenses 280,000 114,000 70,000 96,000
Contribution margin $ 240,000 $ 86,000 $ 70,000 $ 84,000
Fixed expenses 190,000 60,000 74,000 56,000
Net income (loss) $ 50,000 $ 26,000 $ (4,000 ) $ 28,000

The president was told that the fixed expenses of $190,000 included $103,500 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 B is a drag on the whole company. Close it down!"

Required:

a. Evaluate the president's remark.

The president's remark ignores the misleading result of arbitrarily allocated fixed expenses.
The president's remark ignores the misleading result of arbitrarily allocated variable expenses.

b. Calculate what the company's net income would be if Division B were closed down.
Net income without Division B _______.

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

Never arbitrarily allocate fixed expenses.
Never arbitrarily allocate variable expenses.