Jem Dawson owns Jem’s Special Event Planning Service, a full-service event planner. Jem does much of the work herself and hires additional help as needed. She plans corporate events, weddings, and special occasion parties. Each of these is considered a separate line of business due to the specialized aspects of each type of event. Last year, Jem’s accountant provided the following segmented income statement:
Jem was not pleased with last year’s results; corporate events were down considerably from the previous few years. In addition, she thinks that dealing with the corporate party-throwers may be more work than it is worth. Two important aspects of event planning are negotiating with vendors (e.g., caterers, florists, bands and orchestras, and venues) on price and setting up for and being present at the event itself. The corporate negotiating seemed to consume extra time, and their restrictions on the price they would pay made the negotiations particularly difficult.
She decided to gather some data on the negotiation and setting-up activities:
1. Prepare a segmented income statement using the activity data for negotiating and setting up. The total cost of these two activities can be subtracted from the fixed operating expense. The remaining fixed operating expense will be the common fixed operating expense. What does this income statement suggest about the relative profitability of the three product lines?
2. Jem believes that next year will be even worse. Her hunch is that corporate business will be down and that these clients will be especially intent on saving money by reducing the rate paid to Jem. She believes total corporate revenue may decrease by 25 percent overall, while the variable costs associated with those events will only decrease by 20 percent. On the other hand, Jem expects weddings to increase. Her reputation is growing and she thinks she can raise her revenues in this area by 15 percent even if the number of weddings does not increase. As a result, she expects variable costs of weddings to remain static. The special occasions (wedding anniversary parties, bar and bat mitzvahs, and so on) line is also expected to increase—with revenue and variable costs expected to increase by 10 percent.
Jem does not know quite what to expect with respect to the negotiating and setting-up activities, so she thinks she’ll just keep those constant for planning purposes. Prepare a segmented income statement using the activity data and these assumptions. What does this income statement suggest about dropping the corporate segment?