The operations of Winston Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows:
Blink Division Blur Division Total
Sales $ 295,000 $ 174,000 $ 469,000
Variable costs 101,000 80,000 181,000
Contribution margin $ 194,000 $ 94,000 $ 288,000
Direct fixed costs 87,000 73,000 160,000
Segment margin $ 107,000 $ 21,000 $ 128,000
Allocated common costs 42,000 34,500 76,500
Operating income (loss) $ 65,000 $ (13,500 ) $ 51,500
Required:
1. If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the operating income for Winston Corporation, as a whole, would be .
A) $84,500.
B) $65,000.
C) $88,700.
D) $66,950.

c. $88,700

Explanation:

The computation of operating income for Winston Corporation is shown below:-

Particulars              Dropping before              Dropping after

Sales a                  $469,000                           $383,500

                                                                         ($295,000 × 130%)

Variable cost b     $181,000                              $131,300

($101,000 × 130%)

Contribution margin $288,000                          $252,200

(c = a - b)

Direct fixed cost d  $160,000                          $87,000

Segment margin e $128,000                           $165,200

(e = c - d)

Allocated common cost f $76,500                  $76,500

Operating income(loss) $51,500                      $88,700

(g = d - e)

Therefore to reach the operating income(loss) we simply deduct the allocated common cost from segment margin.

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