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 find out the profit margin, we need to first calculate the operating income of both divisions. 
For Parker: 
Revenue - Variable Costs - Fixed Costs = Operating Income 
$2,000,000 - ($500,000 + $300,000) - ($300,000 + $200,000) = $700,000 
For Blaine: 
Revenue - Variable Costs - Fixed Costs = Operating Income 
$1,500,000 - ($450,000 + $250,000) - ($300,000 + $200,000) = $300,000 
Now, to calculate Hamilton's profit margin, we need to divide the total operating income by the total revenue: 
($700,000 + $300,000) / ($2,000,000 + $1,500,000) = 0.286 or 28.6% 
If Blaine were dropped, Hamilton's total revenue would be $2,000,000 and operating income would be: 
$2,000,000 - ($500,000 + $300,000 + $300,000) = $900,000 
Therefore, Hamilton's profit margin would be: 
$900,000 / $2,000,000 = 45% 
The difference in profit margins between the two scenarios is: 
45% - 28.6% = 16.4% 
This difference applied to Blaine's revenue would be: 
$1,500,000 x 16.4% = $246,000 
However, the question asks for the profit margin if Blaine were dropped, not the difference between the two scenarios, so we need to subtract Blaine's operating income from Hamilton's total operating income: 
$900,000 - $300,000 = $600,000 
Finally, we can calculate the profit margin: 
$600,000 / $2,000,000 = 30% 
Therefore, if Blaine were dropped, Hamilton's profit margin would be 30%. The answer is B) $(150,000).