Question

Vulcan Company’s contribution format income statement for June is as follows:

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	900,000
Variable expenses		300,000
Contribution margin		600,000
Fixed expenses		495,000
Net operating income	$	105,000

Management is disappointed with the company’s performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:

1. The company is divided into two sales territories—Northern and Southern. The Northern Territory recorded $400,000 in sales and $200,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $156,000 and $145,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories.

2. The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $190,000 and $210,000, respectively, in the Northern territory during June. Variable expenses are 29% of the selling price for Paks and 69% for Tibs. Cost records show that $93,100 of the Northern Territory’s fixed expenses are traceable to Paks and $46,200 to Tibs, with the remainder common to the two products.

Required:

1-a. Prepare contribution format segmented income statements for the total company broken down between sales territories.

1-b. Prepare contribution format segmented income statements for the Northern Territory broken down by product line.

Answer 1

1-a.

	Total Company	Northern	Southern
	Amount	%	Amount	%	Amount	%
Sales	$900,000	100%	$400,000	100%	$500,000	100%
Less: Variable expenses	300,000	33.33%	200,000	50%	100,000	20%
Contribution margin	600,000	66.67%	200,000	50%	400,000	80%
Less: Traceable fixed expenses	301,000	33.44%	156,000	39%	145,000	29%
Sales territory segment margin	299,000	33.22%	$44,000	11%	$255,000	51%
Less: Common fixed expenses	194,000	21.56%
Net operating income	$105,000	11.67%

Common fixed expenses = $ 495,000 - $ 301,000 = $ 194,000

1-b.

		Product Line
	Northern Territory	Packs	Tips
	Amount	%	Amount	%	Amount	%
Sales	$400,000	100%	$190,000	100%	$210,000	100%
Less: Variable expenses	200,000	50%	55,100	29%	144,900	69%
Contribution margin	200,000	50%	134,900	71%	65,100	31%
Less: Traceable fixed expenses	139,300	34.83%	93,100	49%	46,200	22%
Product line segment margin	60,700	15.18%	41,800	22%	18,900	9%
Less: Common fixed expenses	16,700	4.18%
Sales territory segment margin	$44,000	11%

Common fixed expenses = $ 156,000 - $ 139,300 = $ 16,700