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      465,000

Net operating income   $   27,000

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 $228,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $168,000 and $130,000 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 $140,000 and $260,000, respectively, in the Northern territory during June. Variable expenses are 31% of the selling price for Paks and 71% for Tibs. Cost records show that $64,400 of the Northern Territory’s fixed expenses are traceable to Paks and $52,000 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 lin

Answer 1

Req 1-a: Segment income statetment on the basis of Territories
SEGMENT-WISE INCOME STATEMENT OF THE COMPANY
				TOTAL	NORTHERN	SOUTHERN
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				900,000	400,000	500,000
Less: Variable cost				408,000	228,000	180,000
Contribution margin				492,000	172,000	320,000
Less: Traceable fixed cost				298,000	168,000	130,000
SEGMENT MARGIN				194,000	4,000	190,000
Less: Common Fixed cost of company				167,000
Net Operating Income				27,000
Note: Common Fixed cost= Total fixed cost- Traceable cost = $465000-298000 = $167000
Req 1-B: Segmented Income Statement of Northern Region based on Distributor
SEGMENT-WISE INCOME STATEMENT OF NORTHERN REGION
				TOTAL	PAKS	TIBS
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				400,000	140,000	260,000
Less: Variable cost				228,000	43,400	184,600
Contribution margin				172,000	96,600	75,400
Less: Traceable fixed cost				116,400	64,400	52,000
SEGMENT MARGIN				55,600	32,200	23,400
Less: Common Fixed cost of company				51,600
Net Operating Income				4,000
Note: Common Fixed cost= Traceable fixed cost of northern region- Trceable to Distributors
		($168000 - $116400) = $51,600
Note: variable cost for distributors:
Paks ($140,000 *31%) = $43,400
Tibs (260,000 *71%)= $ 184600