Question

Problem 22.4A Preparing Responsibility Income Statements in a Responsibility Accounting System (LO22-3, LO22-4, LO22-5)

Muscle Bound Co. sells home exercise equipment. The company has two sales territories, Eastern and Western. Two products are sold in each territory: FasTrak (a Nordic ski simulator) and RowMaster (a stationary rowing machine).

  

During January, the following data are reported for the Eastern territory.

	FasTrak				RowMaster
Sales	$	600,000			$	750,000
Contribution margin ratios		55	%			40	%
Traceable fixed costs	$	80,000			$	150,000

Common fixed costs in the Eastern territory amounted to $120,000 during the month.

During January, the Western territory reported total sales of $600,000, variable costs of $270,000, and a responsibility margin of $200,000. Muscle Bound also incurred $180,000 of common fixed costs that were not traceable to either sales territory.

In addition to being profit centers, each territory is also evaluated as an investment center. Average assets utilized by the Eastern and Western territories amount to $14,000,000 and $12,000,000, respectively.

Required:

a. Prepare the January income statement for the Eastern territory by product line.

b. Prepare the January income statement for the company showing profits by sales territories. Conclude your statement with income from operations for the company and with responsibility margins for the two territories.

c. Compute the rate of return on average assets earned in each sales territory during the month of January.

e-1. The manager of the Eastern territory is authorized to spend an additional $50,000 per month to advertise one of the products. Based on past experience, the manager estimates that additional advertising will increase the sales of either product by $120,000?

e-2. On which product should the manager focus this advertising campaign?

Answer 1

Solution:

a) Responsibility income statement of the eastern Territory:

  MUSCLE BOUND COMPANY

Responsibility income statement eastern territory for january

	Eastern Territory		FasTrak		Rowmaster
	Dollors	Percent	Dollars	percent	Dollars	Percent
Sales	$ 1350000	100.0	$600000	100.0	$750000	100.0
variable costs	720000	53.0	270000	45.0	450000	60.0
contribution margin	$630000	47.0	$330000	55.0	$300000	40.0
Fixed costs traceable to product lines	230000	17.0	80000	13.0	150000	20.0
Product responsibility margin	$400000	30.0	$250000	42.0%	$150000	20.0%
Common fixed Costs	120000	9.0
Operating income	$280000	21.0%

b)Responsibility income statement of the entire company.

MUSCLE BOUND COMPANY Responsibility income statement For January.

	Entire Company		Eastern Territory		Western Territory
	Dollars	Percent	Dollars	Percent	Dollars	Percent
Sales	$1950000	100.0	$1350000	100.0	$600000	100.0
variable cost	990000	50.8	720000	53.0	270000	45.0
Contribution	$960000	49.2	$630000	47.0	$330000	55.0
fixed costs traceable to territories	480000	24.6	350000	26.0	130000	21.7
Division responsibility Margin	$480000	24.6	$280000	21.0%	$200000	33.3%
Common fixed costs	180000	9.2
Operating income	$300000	15.4%

* Minor Rounding difference

** $ 350000=$120000 common fixed costs of eastern territory +230000 traceable fixed Costs

c) Each territory's return on asets:

	Eastern territory	Western territory
Responsibility Margin	$280000	$200000
Divided by Average assets	14000000	12000000
Return on assets	2.0%	1.7%

e-1,e-2):

The manager should focus the campaign on the product line that will generate the greatest contribution margin in relation to the additional fixed advertising cost.Thus the manager should support advertising of Fas Trak, as shown Below:

Incremental Revenue	Fas Trak	RowMaster
less: Incremental variable costs(45%,60%)	$120000	$120000
Incremental increase in contribution margin (55%,40%)	54000	72000
Less:Incremental fixed costs	$66000	$48000
Increase (decrease) in responsibility margin	50000	50000
	$16000	$(2000)

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