Hamilton,Inc.has two divisions,Parker and Blaine.Following is the income statement for the previous year: Of the total fixed costs,$600,000 are common fixed costs that are allocated equally between the divisions.What would Hamilton's profit margin be if Blaine were dropped?
A)$(240,000)
B)$(150,000)
C)$110,000
D)$150,000

Question

Hamilton,Inc.has two divisions,Parker and Blaine.Following is the income statement for the previous year:  Of the total fixed costs,$600,000 are common fixed costs that are allocated equally between the divisions.What would Hamilton's profit margin be if Blaine were dropped?
A)$(240,000) 
B)$(150,000) 
C)$110,000 
D)$150,000

Quizplus · Accepted Answer

To calculate Hamilton's profit margin if Blaine were dropped, we need to subtract Blaine's total costs from Hamilton's total revenue and costs. From the income statement, Blaine's total costs are:
Variable costs: $700,000
Fixed costs: $1,500,000 - $600,000 (common fixed costs allocated equally) = $900,000
Total costs: $1,600,000

Therefore, Hamilton's total revenue and costs without Blaine would be:
Revenue: $9,000,000 + $3,000,000 = $12,000,000
Variable costs: $3,500,000 + $700,000 = $4,200,000
Fixed costs: $2,000,000 - $600,000 (common fixed costs allocated equally) + $900,000 = $2,300,000
Total costs: $6,500,000

Profit without Blaine: $12,000,000 - $6,500,000 = $5,500,000
Profit margin without Blaine: $5,500,000 / $12,000,000 = 0.4583 or 45.83%

Therefore, if Blaine were dropped, Hamilton's profit margin would be 45.83%, which is a decrease of 4.17 percentage points from the current profit margin of 50%. The decrease in profit margin is due to the elimination of Blaine's contribution to revenue and the absorption of some of its fixed costs by Parker.

Option B is the correct answer as it represents the amount by which the profit margin would decrease if Blaine were dropped.