Question

Income Statements Segmented by Territory
Script, Inc., has two product lines. The September income statements of each product line and the company are as follows:

SCRIPT, INC. Product Line and Company Income Statements For Month of September
	Pens	Pencils	Total
Sales	$25,000	$30,000	$55,000
Less variable expenses	(10,000)	(12,000)	(22,000)
Contribution margin	15,000	18,000	33,000
Less direct fixed expenses	(10,000)	(9,000)	(19,000)
Product margin	$5,000	$9,000	$14,000
Less common fixed expenses			(6,000)
Net income			$8,000

Pens and pencils are sold in two territories, Florida and Alabama, as follows:

	Florida	Alabama
Pen sales	$16,000	$9,000
Pencil sales	8,000	22,000
Total sales	$24,000	$31,000

The preceding common fixed expenses are traceable to each territory as follows:

Florida fixed expenses	$2,000
Alabama fixed expenses	3,000
Home office administration fixed expenses	1,000
Total common fixed expenses	$6,000

The direct fixed expenses of pens, $10,000, and of pencils, $9,000, cannot be identified with either territory. The company's accountants were unable to allocate any of the common fixed expenses to the various segments.

Prepare income statements segmented by territory for September, including a column for the entire firm. Do not use negative signs with your answers.

Script, Inc. Territory and Company Income Statements For the Month of September
	Florida	Alabama	Company Totals
Sales:
Pens	Answer	Answer	Answer
Pencils	Answer	Answer	Answer
Total sales	Answer	Answer	Answer
Variable costs:
Pens	Answer	Answer	Answer
Pencils	Answer	Answer	Answer
Total	Answer	Answer	Answer
Contribution margin	Answer	Answer	Answer
Direct fixed expenses	Answer	Answer	Answer
Territory margin	Answer	Answer	Answer
Common fixed expenses:
Pens			Answer
Pencils			Answer
Home office			Answer
Total			Answer
Net income			Answer

(b) Why are the direct expenses of one type of segment report not necessarily the direct expenses of another type of segment report?

Because direct expenses are all variable costs.

Because only fixed expenses are direct costs.

Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product).

Because management must decide which costs are direct and which are indirect.

None of the above.

Answer 1

Script, Inc.
Territory and Company Income Statements
For the Month of September
	Florida	Alabama	Company Totals
Sales:
Pens	$16,000.00	$9,000.00	$25,000.00
Pencils	$8,000.00	$22,000.00	$30,000.00
Total sales	$24,000.00	$31,000.00	$55,000.00
Variable costs:
Pens	$6,400.00	$3,600.00	$10,000.00
Pencils	$3,200.00	$8,800.00	$12,000.00
Total	$9,600.00	$12,400.00	$22,000.00
Contribution margin	$14,400.00	$18,600.00	$33,000.00
Direct fixed expenses	$2,000.00	$3,000.00	$5,000.00
Territory margin	$12,400.00	$15,600.00	$28,000.00
Common fixed expenses:
Pens			$10,000.00
Pencils			$9,000.00
Home office			$1,000.00
Total			$20,000.00
Net income			$8,000.00

Part-b : Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product).