{"id":217,"date":"2021-01-26T22:26:05","date_gmt":"2021-01-26T22:26:05","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=217"},"modified":"2021-08-12T16:10:08","modified_gmt":"2021-08-12T16:10:08","slug":"segments","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/segments\/","title":{"raw":"Segments","rendered":"Segments"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Identify profit\/loss centers by product\/segment<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-1771 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17223330\/creativ-94-LXq50H90hd0-unsplash-200x300.jpg\" alt=\"incandescent light bulb\" width=\"200\" height=\"300\" \/>A <strong>segment<\/strong> is a fairly autonomous unit or division of a company defined according to function or product line. Traditionally, owners have organized their companies along functional lines. The segments or departments organized along functional lines perform a specified function such as marketing, finance, purchasing, production, or shipping. Recently, large companies have tended to organize segments according to product lines such as an electrical products division, shoe department, or food division.\r\n\r\nFor example, Thomas Alva Edison started the Edison Electric Light Company in 1878 to market his incandescent lamp and other later products. In 1892, Edison merged his company with two other electric companies and formed the General Electric Company.\r\n\r\nToday, GE identifies the following segments: Power, Renewable Energy, Aviation, Healthcare, and Capital.\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">The Power segment offers technologies, solutions, and services related to energy production, which includes gas and steam turbines, generators, and power generation services.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">The Renewable Energy segment provides wind turbine platforms, hardware and software, offshore wind turbines, solutions, products and services to the hydropower industry, blades for onshore and offshore wind turbines, and high voltage equipment.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">The Aviation segment provides jet engines and turboprops for commercial airframes, maintenance, component repair, and overhaul services, as well as replacement parts, additive machines and materials, and engineering services.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">The Healthcare segment provides healthcare technologies in medical imaging, digital solutions, patient monitoring, diagnostics, drug discovery, biopharmaceutical manufacturing technologies, and performance enhancement solutions.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">The Capital segment leases and finances aircraft, aircraft engines, and helicopters, and also provides financial and underwriting solutions.<\/li>\r\n<\/ul>\r\nHere are five questions you can address as you contemplate segments:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Does the segment have a positive contribution margin?<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">What happens to fixed costs if we eliminate a segment?<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">How will dropping a product or segment affect other areas of the business?<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">What can the company do with freed-up capacity?<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">What are the qualitative (non-financial) considerations?<\/li>\r\n<\/ol>\r\nLet\u2019s look at a hypothetical company called 3Yachts, Inc. Management and the owners of the company are concerned about the low amount of operating income. The company produces three different models of sailboats: the HighLine, which sells for $11,000; the MidLine, which sells for $6,500; and the LowLine, the base model, which sells for $4,000.\r\n\r\nThe current contribution margin income statement looks like this:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>3Yachts, Inc.\r\nCVP Analysis (month)<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">$\u00a0 580,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">465,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution margin<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>114,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td class=\"r\">110,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a04,200<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nManagement is thinking about dropping the base model, but they want more information. You have been asked to analyze operating income by product line (segment).\r\n\r\nHere is the sales price by model:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">MidLine<\/th>\r\n<th class=\"r\" scope=\"col\">HighLine<\/th>\r\n<th class=\"r\" scope=\"col\">LowLine<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$6,500.00<\/td>\r\n<td class=\"r\">$11,000.00<\/td>\r\n<td class=\"r\">$4,000.00<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nHere is the information you have gathered on variable costs:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">MidLine<\/th>\r\n<th class=\"r\" scope=\"col\">HighLine<\/th>\r\n<th class=\"r\" scope=\"col\">LowLine<\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Hulls<\/td>\r\n<td class=\"r\">$2,000.00<\/td>\r\n<td class=\"r\">$3,000.00<\/td>\r\n<td class=\"r\">$1,000.00<\/td>\r\n<td>each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Outfitting<\/td>\r\n<td class=\"r\">$1,000.00<\/td>\r\n<td class=\"r\">$3,500.00<\/td>\r\n<td class=\"r\">$600.00<\/td>\r\n<td>each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Labor per assembled boat<\/td>\r\n<td class=\"r\">$1,500.00<\/td>\r\n<td class=\"r\">$5,000.00<\/td>\r\n<td class=\"r\">$1,500.00<\/td>\r\n<td>each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Commission<\/td>\r\n<td class=\"r\">3.00%<\/td>\r\n<td class=\"r\">5.00%<\/td>\r\n<td class=\"r\">2.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWhich you have summarized:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable Costs per Unit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">MidLine<\/th>\r\n<th class=\"r\" scope=\"col\">HighLine<\/th>\r\n<th class=\"r\" scope=\"col\">LowLine<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Hulls<\/td>\r\n<td class=\"r\">$2,000<\/td>\r\n<td class=\"r\">$3,000<\/td>\r\n<td class=\"r\">$1,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Outfitting<\/td>\r\n<td class=\"r\">1,000<\/td>\r\n<td class=\"r\">3,500<\/td>\r\n<td class=\"r\">600<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Labor per assembled boat<\/td>\r\n<td class=\"r\">1,500<\/td>\r\n<td class=\"r\">5,000<\/td>\r\n<td class=\"r\">1,500<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Commission<\/td>\r\n<td class=\"r\">195<\/td>\r\n<td class=\"r\">550<\/td>\r\n<td class=\"r\">80<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$4,695<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$12,050<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,180<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAnd you have identified fixed costs as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed costs per month<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Salary<\/td>\r\n<td class=\"r\">$ \u00a0 10,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Selling, General, and Administrative<\/td>\r\n<td class=\"r\">90,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Production Facility Rent<\/td>\r\n<td class=\"r\">10,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ 110,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nBy modifying the CVP model slightly, you can show that the HighLine model is the culprit here. It sells for $11,000 but costs $12,050 to produce, not including fixed overhead.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>3Yachts, Inc.\r\nProduct Mix\r\nCVP Analysis (month)<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">MidLine<\/th>\r\n<th class=\"r\" scope=\"col\">HighLine<\/th>\r\n<th class=\"r\" scope=\"col\">LowLine<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assumptions<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales price per unit<\/td>\r\n<td class=\"r\">$6,500<\/td>\r\n<td class=\"r\">$11,000<\/td>\r\n<td class=\"r\">$4,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable cost per unit<\/td>\r\n<td class=\"r\">$4,695<\/td>\r\n<td class=\"r\">$12,050<\/td>\r\n<td class=\"r\">$3,180<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,805<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">($1,050)<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$820<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs per month<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$110,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales volume<\/td>\r\n<td class=\"r\">60<\/td>\r\n<td class=\"r\">10<\/td>\r\n<td class=\"r\">20<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>CVP Model Results<\/strong><\/td>\r\n<td class=\"r\">MidLine<\/td>\r\n<td class=\"r\">HighLine<\/td>\r\n<td class=\"r\">LowLine<\/td>\r\n<td class=\"r\">Total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">$\u00a0 390,000<\/td>\r\n<td class=\"r\">$\u00a0 110,000<\/td>\r\n<td class=\"r\">$ \u00a0 80,000<\/td>\r\n<td class=\"r\">$\u00a0 580,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">281,700<\/td>\r\n<td class=\"r\">120,500<\/td>\r\n<td class=\"r\">63,600<\/td>\r\n<td class=\"r\">465,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution margin<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>108,300<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">(10,500)<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>16,400<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>114,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">110,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a04,200<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<h3>Question 1: Does the segment have a positive contribution margin?<\/h3>\r\nOften, in deciding whether to keep or drop a product line, segment, or territory or other business unit (we\u2019ll use the term \u2018segment\u2019 from here on to represent all of these), management will start with the contribution margin.\r\n\r\nYou can review the contribution margin here:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352530&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=fyAEVKCSjcI&amp;video_target=tpm-plugin-rklkx3yr-fyAEVKCSjcI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ContributionMarginIncomeStatement_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Contribution Margin Income Statement\" here (opens in new window)<\/a>.\r\n\r\nIf a segment has a negative contribution margin, it\u2019s not even covering its variable costs, and unless it is a product with some future potential (like an electric motorcycle) or that contributes to other sales (such as a line of printers that supports a profitable toner cartridge segment), it should probably be dropped.\r\n\r\nLet\u2019s look at what would happen to this company if we drop the HighLine model:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>3Yachts, Inc.\r\nProduct Mix\r\nCVP Analysis (month)<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">MidLine<\/th>\r\n<th class=\"r\" scope=\"col\">HighLine<\/th>\r\n<th class=\"r\" scope=\"col\">LowLine<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assumptions<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales price per unit<\/td>\r\n<td class=\"r\">$6,500<\/td>\r\n<td class=\"r\">$11,000<\/td>\r\n<td class=\"r\">$4,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable cost per unit<\/td>\r\n<td class=\"r\">$4,695<\/td>\r\n<td class=\"r\">$12,050<\/td>\r\n<td class=\"r\">$3,180<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,805<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">($1,050)<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$820<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs per month<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$110,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales volume<\/td>\r\n<td class=\"r\">60<\/td>\r\n<td class=\"r\">0<\/td>\r\n<td class=\"r\">20<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>CVP Model Results<\/strong><\/td>\r\n<td class=\"r\">MidLine<\/td>\r\n<td class=\"r\">HighLine<\/td>\r\n<td class=\"r\">LowLine<\/td>\r\n<td class=\"r\">Total<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">$\u00a0 390,000<\/td>\r\n<td class=\"r\">-<\/td>\r\n<td class=\"r\">$ \u00a0 80,000<\/td>\r\n<td class=\"r\">$\u00a0 470,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">281,700<\/td>\r\n<td class=\"r\">-<\/td>\r\n<td class=\"r\">63,600<\/td>\r\n<td class=\"r\">345,300<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution margin<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>108,300<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">-<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>16,400<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>124,700<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">110,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a014,700<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nLet\u2019s look at this using differential analysis:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Expected decrease in revenue<\/td>\r\n<td class=\"r\"><span style=\"color: #ff0000;\">$ (110,000)<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Expected decrease in total variable costs<\/td>\r\n<td class=\"r\">120,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Expected increase\/(decrease) in operating income<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 10,500<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Current operating income<\/td>\r\n<td class=\"r\">$4,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Expected increase\/(decrease) in operating income<\/td>\r\n<td class=\"r\">$10,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Projected operating income<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$14,700<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nIt seems fairly obvious that we should drop the HighLine model and concentrate on the MidLine since that has the highest contribution margin.\r\n\r\nBut we have only addressed the first of the five proposed questions. We\u2019ll explore the remaining questions in the next section, but first, check your understanding of market segments.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]220631[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Identify profit\/loss centers by product\/segment<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1771 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17223330\/creativ-94-LXq50H90hd0-unsplash-200x300.jpg\" alt=\"incandescent light bulb\" width=\"200\" height=\"300\" \/>A <strong>segment<\/strong> is a fairly autonomous unit or division of a company defined according to function or product line. Traditionally, owners have organized their companies along functional lines. The segments or departments organized along functional lines perform a specified function such as marketing, finance, purchasing, production, or shipping. Recently, large companies have tended to organize segments according to product lines such as an electrical products division, shoe department, or food division.<\/p>\n<p>For example, Thomas Alva Edison started the Edison Electric Light Company in 1878 to market his incandescent lamp and other later products. In 1892, Edison merged his company with two other electric companies and formed the General Electric Company.<\/p>\n<p>Today, GE identifies the following segments: Power, Renewable Energy, Aviation, Healthcare, and Capital.<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The Power segment offers technologies, solutions, and services related to energy production, which includes gas and steam turbines, generators, and power generation services.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The Renewable Energy segment provides wind turbine platforms, hardware and software, offshore wind turbines, solutions, products and services to the hydropower industry, blades for onshore and offshore wind turbines, and high voltage equipment.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The Aviation segment provides jet engines and turboprops for commercial airframes, maintenance, component repair, and overhaul services, as well as replacement parts, additive machines and materials, and engineering services.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The Healthcare segment provides healthcare technologies in medical imaging, digital solutions, patient monitoring, diagnostics, drug discovery, biopharmaceutical manufacturing technologies, and performance enhancement solutions.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The Capital segment leases and finances aircraft, aircraft engines, and helicopters, and also provides financial and underwriting solutions.<\/li>\n<\/ul>\n<p>Here are five questions you can address as you contemplate segments:<\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Does the segment have a positive contribution margin?<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">What happens to fixed costs if we eliminate a segment?<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">How will dropping a product or segment affect other areas of the business?<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">What can the company do with freed-up capacity?<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">What are the qualitative (non-financial) considerations?<\/li>\n<\/ol>\n<p>Let\u2019s look at a hypothetical company called 3Yachts, Inc. Management and the owners of the company are concerned about the low amount of operating income. The company produces three different models of sailboats: the HighLine, which sells for $11,000; the MidLine, which sells for $6,500; and the LowLine, the base model, which sells for $4,000.<\/p>\n<p>The current contribution margin income statement looks like this:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>3Yachts, Inc.<br \/>\nCVP Analysis (month)<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">$\u00a0 580,000<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">465,800<\/td>\n<\/tr>\n<tr>\n<td>Contribution margin<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>114,200<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td class=\"r\">110,000<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a04,200<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Management is thinking about dropping the base model, but they want more information. You have been asked to analyze operating income by product line (segment).<\/p>\n<p>Here is the sales price by model:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">MidLine<\/th>\n<th class=\"r\" scope=\"col\">HighLine<\/th>\n<th class=\"r\" scope=\"col\">LowLine<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$6,500.00<\/td>\n<td class=\"r\">$11,000.00<\/td>\n<td class=\"r\">$4,000.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Here is the information you have gathered on variable costs:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">MidLine<\/th>\n<th class=\"r\" scope=\"col\">HighLine<\/th>\n<th class=\"r\" scope=\"col\">LowLine<\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Hulls<\/td>\n<td class=\"r\">$2,000.00<\/td>\n<td class=\"r\">$3,000.00<\/td>\n<td class=\"r\">$1,000.00<\/td>\n<td>each<\/td>\n<\/tr>\n<tr>\n<td>Outfitting<\/td>\n<td class=\"r\">$1,000.00<\/td>\n<td class=\"r\">$3,500.00<\/td>\n<td class=\"r\">$600.00<\/td>\n<td>each<\/td>\n<\/tr>\n<tr>\n<td>Labor per assembled boat<\/td>\n<td class=\"r\">$1,500.00<\/td>\n<td class=\"r\">$5,000.00<\/td>\n<td class=\"r\">$1,500.00<\/td>\n<td>each<\/td>\n<\/tr>\n<tr>\n<td>Commission<\/td>\n<td class=\"r\">3.00%<\/td>\n<td class=\"r\">5.00%<\/td>\n<td class=\"r\">2.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Which you have summarized:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable Costs per Unit<\/strong><\/td>\n<\/tr>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">MidLine<\/th>\n<th class=\"r\" scope=\"col\">HighLine<\/th>\n<th class=\"r\" scope=\"col\">LowLine<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Hulls<\/td>\n<td class=\"r\">$2,000<\/td>\n<td class=\"r\">$3,000<\/td>\n<td class=\"r\">$1,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Outfitting<\/td>\n<td class=\"r\">1,000<\/td>\n<td class=\"r\">3,500<\/td>\n<td class=\"r\">600<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Labor per assembled boat<\/td>\n<td class=\"r\">1,500<\/td>\n<td class=\"r\">5,000<\/td>\n<td class=\"r\">1,500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Commission<\/td>\n<td class=\"r\">195<\/td>\n<td class=\"r\">550<\/td>\n<td class=\"r\">80<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$4,695<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$12,050<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,180<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>And you have identified fixed costs as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed costs per month<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Salary<\/td>\n<td class=\"r\">$ \u00a0 10,000<\/td>\n<\/tr>\n<tr>\n<td>Selling, General, and Administrative<\/td>\n<td class=\"r\">90,000<\/td>\n<\/tr>\n<tr>\n<td>Production Facility Rent<\/td>\n<td class=\"r\">10,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ 110,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>By modifying the CVP model slightly, you can show that the HighLine model is the culprit here. It sells for $11,000 but costs $12,050 to produce, not including fixed overhead.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>3Yachts, Inc.<br \/>\nProduct Mix<br \/>\nCVP Analysis (month)<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">MidLine<\/th>\n<th class=\"r\" scope=\"col\">HighLine<\/th>\n<th class=\"r\" scope=\"col\">LowLine<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assumptions<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales price per unit<\/td>\n<td class=\"r\">$6,500<\/td>\n<td class=\"r\">$11,000<\/td>\n<td class=\"r\">$4,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Variable cost per unit<\/td>\n<td class=\"r\">$4,695<\/td>\n<td class=\"r\">$12,050<\/td>\n<td class=\"r\">$3,180<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,805<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">($1,050)<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$820<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Fixed costs per month<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$110,000<\/td>\n<\/tr>\n<tr>\n<td>Sales volume<\/td>\n<td class=\"r\">60<\/td>\n<td class=\"r\">10<\/td>\n<td class=\"r\">20<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>CVP Model Results<\/strong><\/td>\n<td class=\"r\">MidLine<\/td>\n<td class=\"r\">HighLine<\/td>\n<td class=\"r\">LowLine<\/td>\n<td class=\"r\">Total<\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">$\u00a0 390,000<\/td>\n<td class=\"r\">$\u00a0 110,000<\/td>\n<td class=\"r\">$ \u00a0 80,000<\/td>\n<td class=\"r\">$\u00a0 580,000<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">281,700<\/td>\n<td class=\"r\">120,500<\/td>\n<td class=\"r\">63,600<\/td>\n<td class=\"r\">465,800<\/td>\n<\/tr>\n<tr>\n<td>Contribution margin<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>108,300<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">(10,500)<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>16,400<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>114,200<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">110,000<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a04,200<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<h3>Question 1: Does the segment have a positive contribution margin?<\/h3>\n<p>Often, in deciding whether to keep or drop a product line, segment, or territory or other business unit (we\u2019ll use the term \u2018segment\u2019 from here on to represent all of these), management will start with the contribution margin.<\/p>\n<p>You can review the contribution margin here:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352530&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=fyAEVKCSjcI&amp;video_target=tpm-plugin-rklkx3yr-fyAEVKCSjcI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ContributionMarginIncomeStatement_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Contribution Margin Income Statement&#8221; here (opens in new window)<\/a>.<\/p>\n<p>If a segment has a negative contribution margin, it\u2019s not even covering its variable costs, and unless it is a product with some future potential (like an electric motorcycle) or that contributes to other sales (such as a line of printers that supports a profitable toner cartridge segment), it should probably be dropped.<\/p>\n<p>Let\u2019s look at what would happen to this company if we drop the HighLine model:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>3Yachts, Inc.<br \/>\nProduct Mix<br \/>\nCVP Analysis (month)<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">MidLine<\/th>\n<th class=\"r\" scope=\"col\">HighLine<\/th>\n<th class=\"r\" scope=\"col\">LowLine<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assumptions<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales price per unit<\/td>\n<td class=\"r\">$6,500<\/td>\n<td class=\"r\">$11,000<\/td>\n<td class=\"r\">$4,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Variable cost per unit<\/td>\n<td class=\"r\">$4,695<\/td>\n<td class=\"r\">$12,050<\/td>\n<td class=\"r\">$3,180<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$1,805<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">($1,050)<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$820<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Fixed costs per month<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$110,000<\/td>\n<\/tr>\n<tr>\n<td>Sales volume<\/td>\n<td class=\"r\">60<\/td>\n<td class=\"r\">0<\/td>\n<td class=\"r\">20<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>CVP Model Results<\/strong><\/td>\n<td class=\"r\">MidLine<\/td>\n<td class=\"r\">HighLine<\/td>\n<td class=\"r\">LowLine<\/td>\n<td class=\"r\">Total<\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">$\u00a0 390,000<\/td>\n<td class=\"r\">&#8211;<\/td>\n<td class=\"r\">$ \u00a0 80,000<\/td>\n<td class=\"r\">$\u00a0 470,000<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">281,700<\/td>\n<td class=\"r\">&#8211;<\/td>\n<td class=\"r\">63,600<\/td>\n<td class=\"r\">345,300<\/td>\n<\/tr>\n<tr>\n<td>Contribution margin<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>108,300<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span><span style=\"color: #ff0000;\">&#8211;<\/span><span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>16,400<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>124,700<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">110,000<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a014,700<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Let\u2019s look at this using differential analysis:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Expected decrease in revenue<\/td>\n<td class=\"r\"><span style=\"color: #ff0000;\">$ (110,000)<\/span><\/td>\n<\/tr>\n<tr>\n<td>Expected decrease in total variable costs<\/td>\n<td class=\"r\">120,500<\/td>\n<\/tr>\n<tr>\n<td>Expected increase\/(decrease) in operating income<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 10,500<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Current operating income<\/td>\n<td class=\"r\">$4,200<\/td>\n<\/tr>\n<tr>\n<td>Expected increase\/(decrease) in operating income<\/td>\n<td class=\"r\">$10,500<\/td>\n<\/tr>\n<tr>\n<td>Projected operating income<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$14,700<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>It seems fairly obvious that we should drop the HighLine model and concentrate on the MidLine since that has the highest contribution margin.<\/p>\n<p>But we have only addressed the first of the five proposed questions. We\u2019ll explore the remaining questions in the next section, but first, check your understanding of market segments.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm220631\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=220631&theme=oea&iframe_resize_id=ohm220631\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-217\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Segments. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Lightbulb. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/LXq50H90hd0\">https:\/\/unsplash.com\/photos\/LXq50H90hd0<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Contribution Margin Income Statement. <strong>Authored by<\/strong>: Kristin Ingram. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/fyAEVKCSjcI\">https:\/\/youtu.be\/fyAEVKCSjcI<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":13,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Segments\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Contribution Margin Income Statement\",\"author\":\"Kristin Ingram\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/fyAEVKCSjcI\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"cc\",\"description\":\"Lightbulb\",\"author\":\"\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/LXq50H90hd0\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-217","chapter","type-chapter","status-publish","hentry"],"part":35,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/217","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":13,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/217\/revisions"}],"predecessor-version":[{"id":2552,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/217\/revisions\/2552"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/35"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/217\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=217"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=217"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=217"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=217"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}