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		408,000
Contribution margin		492,000
Fixed expenses		455,000
Net operating income	$	37,000
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: The company is divided into two sales territories—Northern and Southern. The Northern Territory recorded $400,000 in sales and $208,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $164,000 and $125,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories. The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $150,000 and $250,000, respectively, in the Northern territory during June. Variable expenses are 22% of the selling price for Paks and 70% for Tibs. Cost records show that $67,500 of the Northern Territory’s fixed expenses are traceable to Paks and $60,000 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

					Sales Territory
			total company		Northern		Southern
			Amount	%	Amount	%	Amount	%
Sales			900,000	100.0%	400,000	100.0%	500,000	100.0%
variable expenses			408,000	45.3%	208,000	52.0%	200,000	40.0%
contribution margin			492,000	54.7%	192,000	48.0%	300,000	60.0%
Traceable fixed expenses			289,000	32.1%	164,000	41.0%	125,000	25.0%
sales territory segment margin			203,000	22.6%	28,000	7.0%	175,000	35.0%
common fixed expense			166,000	18.4%
net operating income			37,000	4.1%
					Product line
			Northern territory		paks		Tibs
			Amount	%	Amount	%	Amount	%
Sales			400,000	100.0%	150,000	100.0%	250,000	100.0%
variable expenses			208,000	52.0%	33,000	22.0%	175,000	70.0%
contribution margin			192,000	48.0%	117,000	78.0%	75,000	30.0%
Traceable fixed expenses			127,500	31.9%	67,500	45.0%	60,000	24.0%
sales territory segment margin			64,500	16.1%	49,500	33.0%	15,000	6.0%
common fixed expense			36,500
net operating income			28,000