Question

Problem 6-21 (Static) Segment Reporting and Decision-Making [LO6-4]

Vulcan Company’s contribution format income statement for June is as follows:

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	750,000
Variable expenses		336,000
Contribution margin		414,000
Fixed expenses		378,000
Net operating income	$	36,000

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:

1. The company is divided into two sales territories—Northern and Southern. The Northern territory recorded $300,000 in sales and $156,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern territory. Fixed expenses of $120,000 and $108,000 are traceable to the Northern and Southern territories, respectively. The rest of the fixed expenses are common to the two territories.

2. The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $50,000 and $250,000, respectively, in the Northern territory during June. Variable expenses are 22% of the selling price for Paks and 58% for Tibs. Cost records show that $30,000 of the Northern territory’s fixed expenses are traceable to Paks and $40,000 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 line.

Answer 1

REQUIREMENT 1-a Sales Territory Sales Territory Total Company Northern Southern Amount % Amount % Amount % Sales $7,50,000 100.00% $3,00,000 100.00% $4,50,000 100.00% Variable Expenses $3,36,000 44.80% $1,56,000 52.00% $1,80,000 40.00% Contribution Margin $4,14,000 55.20% $1,44,000 48.00% $2,70,000 60.00% Traceable Fixed Expenses $2,28,000 30.40% $1,20,000 40.00% $1,08,000 24.00% Sales Territory Segment Margin $1,86,000 24.80% $24,000 8.00% $1,62,000 36.00% Common Fixed Expense $1,50,000 20.00% Net Operating Income $36,000 4.80% REQUIREMENT 1-b Product Line Product Line Northern Territory Paks Tibs Amount % Amount % Amount % Sales $3,00,000 100.00% $50,000 100.00% $2,50,000 100.00% Variable Expenses $1,56,000 52.00% $11,000 22.00% $1,45,000 58.00% Contribution Margin $1,44,000 48.00% $39,000 78.00% $1,05,000 42.00% Traceable Fixed Expenses $70,000 23.33% $30,000 60.00% $40,000 16.00% Product Line Segment Margin $74,000 24.67% $9,000 18.00% $65,000 26.00% Common Fixed Expense $50,000 16.67% Net Operating Income $24,000 8.00%