Question

Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The company’s major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacific Rim’s board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement.

Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings.

	Product Lines
	Furniture			Sports			Appliances			Total
Production and sales in units		170,000			212,500			170,000			552,500
Average selling price per unit	$	9.00		$	20.00		$	20.00
Average variable manufacturing cost per unit		4.00			10.20			14.50
Average variable selling expense per unit		3.00			2.40			2.25
Fixed manufacturing overhead, excluding depreciation										$	562,000
Depreciation of plant and equipment											442,000
Administrative and selling expense											1,180,000

   

1. The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.

2. Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.

3. There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.

Manufacturing Staff				Sales Staff
Furniture	$	125,000		United States	$	65,000
Sports		145,000		Canada		105,000
Appliances		85,000		Asia		255,000

   

4. The division managers were able to provide reliable sales percentages for their product lines by geographical area.

	Percentage of Unit Sales
	United States		Canada		Asia
Furniture	40	%	20	%	40	%
Sports	40	%	40	%	20	%
Appliances	30	%	30	%	40	%

   

Murphy prepared the following product-line income statement based on the data presented above.

   

PACIFIC RIM INDUSTRIES
Segmented Income Statement by Product Lines
For the Fiscal Year Ended April 30, 20x0
	Product Lines
	Furniture				Sports				Appliances				Unallocated				Total
Sales in units		170,000				212,500				170,000
Sales	$	1,530,000			$	4,250,000			$	3,400,000				—			$	9,180,000
Variable manufacturing and selling costs		1,190,000				2,677,500				2,847,500				—				6,715,000
Contribution margin	$	340,000			$	1,572,500			$	552,500				—			$	2,465,000
Fixed costs:
Fixed manufacturing overhead	$	99,595			$	224,089			$	238,316			$	—			$	562,000
Depreciation		136,000				170,000				136,000				—				442,000
Administrative and selling expenses		125,000				145,000				85,000				825,000				1,180,000
Total fixed costs	$	360,595			$	539,089			$	459,316			$	825,000			$	2,184,000
Operating income (loss)	$	(20,595	)		$	1,033,411			$	93,184			$	(825,000	)		$	281,000

Required:

1. Prepare a segmented income statement for Pacific Rim Industries based on the company’s geographical areas. The statement should show the operating income for each segment. (Do not round your intermediate calculations and round your final answers to the nearest dollar amount.)

Answer 1

PACIFIC RIM INDUSTRIES
SEGMENTED INCOME STATEMENT BY GEOGRAPHIC AREAS
For the Fiscal Year Ended April 30, 20x0	Geographic Areas
	United States	Canada	Asia	Unallocated	Total
Sales in units
Furniture	68,000.00	34,000.00	68,000.00		1,70,000.00
Sports	85,000.00	85,000.00	42,500.00		2,12,500.00
Appliances	51,000.00	51,000.00	68,000.00		1,70,000.00
Total Unit Sales	2,04,000.00	1,70,000.00	1,78,500.00		5,52,500.00
Revenue
Furniture	6,12,000.00	3,06,000.00	6,12,000.00		15,30,000.00
Sports	17,00,000.00	17,00,000.00	8,50,000.00		42,50,000.00
Appliances	10,20,000.00	10,20,000.00	13,60,000.00		34,00,000.00
Total Revenue	33,32,000.00	30,26,000.00	28,22,000.00		91,80,000.00
Variable costs
Furniture	4,76,000.00	2,38,000.00	4,76,000.00		11,90,000.00
Sports	10,71,000.00	10,71,000.00	5,35,500.00		26,77,500.00
Appliances	8,54,250.00	8,54,250.00	11,39,000.00		28,47,500.00
Total variable costs	24,01,250.00	21,63,250.00	21,50,500.00		67,15,000.00
Contribution margin	9,30,750.00	8,62,750.00	6,71,500.00		24,65,000.00
Fixed costs
Fixed manufacturing overhead	$          2,00,968.35	$   1,81,049.37	$   1,79,982.28		5,62,000
Depreciation	$          1,63,200.00	$   1,36,000.00	$   1,42,800.00		4,42,000
Administrative and selling expenses	$             65,000.00	$   1,05,000.00	$   2,55,000.00	$  7,55,000.00	11,80,000
Total fixed costs	$          4,29,168.35	$   4,22,049.37	$   5,77,782.28	$  7,55,000.00	21,84,000
Operating income(loss)	$               5,01,582	$        4,40,701	$           93,718	$      (7,55,000)	$        2,81,000