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		140,000	176,000	140,000	456,400
Average selling price per unit		$9.00	$20.00	$23.00
Average variable manufacturing cost per unit		5.00	10.00	15.00
Average variable selling expense per unit		2.00	2.50	2.75
Fixed manufacturing overhead, excluding depreciation					$524,000
Depreciation of plant and equipment					365,120
Administrative and selling expense					1,180,000

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: $115,000	United States: $55,000
Sports: 135,000	Canada: 95,000
Appliances: 75,000	Asia: 245,000

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		140,000				176,400				140,000
Sales	$	1,260,000			$	3,528,000			$	3,220,000				—			$	8,008,000
Variable manufacturing and selling costs		980,000				2,205,000				2,485,000				—				5,670,000
Contribution margin	$	280,000			$	1,323,000			$	735,000				—			$	2,338,000
Fixed costs:
Fixed manufacturing overhead	$	90,568			$	203,778			$	229,654			$	—			$	524,000
Depreciation		112,000				141,120				112,000				—				365,120
Administrative and selling expenses		115,000				135,000				75,000				855,000				1,180,000
Total fixed costs	$	317,568			$	479,898			$	416,654			$	855,000			$	2,069,120
Operating income (loss)	$	(37,568)			$	843,102			$	318,346			$	(855,000)			$	268,880

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

Pasific Rim Industries
Segmented Income Statement by Geografical Lines
	Geografical area
Particulars	United States	Canada	Asia	Unallocated	Total
Sales in Units
Furniture	56000	28000	56000		140000
Sports	70560	70560	35280		176400
Appliences	42000	42000	56000		140000
Total Units	168560	140560	147280		456400
Sales in $
Furniture	504000	252000	504000		1260000
Sports	1411200	1411200	705600		3528000
Appliences	966000	966000	1288000		3220000
A:Total Sales	2881200	2629200	2497600		8008000
Less: Variable manufacturing expenses (Units*Per unit cost)
Furniture	280000	140000	280000		700000
Sports	705600	705600	352800		1764000
Appliences	630000	630000	840000		2100000
B: Total Variable manufacturing cost	1615600	1475600	1472800		4564000
Less: Variable Selling expenses (Units*Per unit cost)
Furniture	112000	56000	112000		280000
Sports	176400	176400	88200		441000
Appliences	115500	115500	154000		385000
C :Total Variable Selling cost	403900	347900	354200		1106000
D :Total Variable cost B+D	2019500	1823500	1827000		5670000
E :Contribution Margin A-D	861700	805700	670600		2338000
Less: Fixed cost
Fixed manufacturing overhead	191359.49	164827.85	167812.66		524000.00
Depreciation	134848.00	112448.00	117824.00		365120.00
Administrative & Selling Exp	55000	95000	245000	785000	1180000
F: Total Fixed Cost	381207.49	372275.85	530636.66		2069120.00
Operating Income/Loss E-F	480493	433424	139963	-785000	268880

In case of any further doubt or clarification kindly comment and give feedback to the solution