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			176,400			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

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	$	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 are

	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

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