Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:
The president of the company is considering dropping the property insurance. However, some policyholders prefer having their property and automobile insurance with the same company, so if property insurance is dropped, sales of automobile insurance will drop by 12 percent. No significant non-unit-level activity costs are incurred.
1. If Devern Assurance Company drops property insurance, by how much will income increase or decrease? Provide supporting computations.
2. Assume that dropping all advertising for the property insurance line and increasing the corporate advertising budget by $450,000 will increase sales of property insurance by 10 percent and automobile insurance by 8 percent. Prepare a segmented income statement that reflects the effect of increased advertising. Should advertising be increased?