Question

More company has two divisions, L and M. During July, the contribution margin in Division L was $60,000. The contribution margin ratio in Division M was 40% and its sales were $250,000. Division M’s segment margin was $60,000. The common fixed expenses were $50,000 and the company operating income was $20,000. The segment margin for Division L was:

A. 0

B. 10,000

C. 50,000

D. 60,000

Answer 1

• All working forms part of the workings
• Segment margin Division L = Contribution margin - Traceable fixed expense
• Answer:

Contribution margin – Traceable fixed expense [See Steps below for Traceable fixed expenses for ‘L’]

= 60000 – 50000 = $ 10,000 Segment margin for Division L

Correct Answer = Option ‘B’ $ 10,000

• Step 1: Calculate Contribution margin of Division M

Sales = $ 250,000

CM % = 40%

Contribution margin = 250000 x 40% = $ 100,000

• Step 2: Find Traceable fixed expense for Division M

A	Segment Margin	$                60,000
C = 250000 x 40%	Contribution margin	$              100,000
B = C - A	Traceable Fixed expense	$                40,000

• Step 3: Calculate Traceable expense for Division L

Working		Division L	Division M	Total of Company
A	Contribution margin	$          60,000 [given]	$            100,000 [calculated above in Step 1]	$                    160,000
B	Operating Income			$                      20,000 [given]
C = A - B	Fixed Expenses			$                    140,000 [160000 -20000]
D	Common Fixed Expenses			$                      50,000 [given]
E = C - D	Traceable Fixed Expense			$                      90,000 [140000 – 50000]
	Traceable Expense classification	$          50,000 [90000 – 40000]	$              40,000 [calculated above in Step 2]