Question

Tennessee Company is geographically segmented into two divisions – East and West. The company’s income statement for the last month is presented below:

	Total Company			Division
		% of sales	West	% sales	East	% sales
Sales	$8,500,000		$4,675,000		$3,825,000
Variable expenses	3,395,750		1,636,250		1,759,500
Contribution margin	$5,104,250	60%	$3,038,750	65%	$2,065,500	54%
Total Fixed expenses	3,825,000	45%	1,912,500	41%	1,912,500	50%
Net income	$1,279,250	15%	$1,126,250	24%	$153,000	4%

Management is concerned with the reported results, especially the East Division’s net income results in relation to the net income results of the West Division. They have asked you to examine the East Division in relation to West Division and further to examine the East Division to determine if any of the three product lines are causing the low level of profitability in that division.

You have been provided the following additional information:

Of the total fixed expenses reported above, management has determined that 30% are traceable the East Division, 55% are traceable to the West Division. The remaining fixed expenses are common to both divisions.

The East provided the following respecting the three product lines:

	Product Line
	Cola	Fruit Drinks	Flavoured Water
Sales	$1,147,500	$1,721,250	$956,250
Traceable fixed expenses
Administration	103,275	103,275	51,638
Advertising	255,606	139,421	69,711
Depreciation	123,930	154,913	30,983
Variable Expenses	351,900	615,825	791,775

The remaining fixed costs for the East Division are common to all product lines.

Required:

1. Prepare segmented income statements for:

   a)total company broken down between the two divisions,
   b)the East Division broken down by product line.   

Show both amount and percent columns for all information.  

2. What observations and recommendations would you make to management based on your analysis? Be sure to integrate your analysis.

Answer 1