Question

Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The company’s major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacific Rim’s board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement.

Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings.

	Product Lines
	Furniture			Sports			Appliances			Total
Production and sales in units		240,000			225,000			240,000			705,000
Average selling price per unit	$	6.00		$	18.00		$	18.00
Average variable manufacturing cost per unit		3.00			10.00			11.00
Average variable selling expense per unit		2.00			2.00			2.25
Fixed manufacturing overhead, excluding depreciation										$	549,000
Depreciation of plant and equipment											564,000
Administrative and selling expense											1,190,000

   

The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.

Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.

There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.

Manufacturing Staff				Sales Staff
Furniture	$	115,000		United States	$	55,000
Sports		135,000		Canada		95,000
Appliances		75,000		Asia		245,000

   

The division managers were able to provide reliable sales percentages for their product lines by geographical area.

	Percentage of Unit Sales
	United States		Canada		Asia
Furniture	40	%	20	%	40	%
Sports	40	%	40	%	20	%
Appliances	20	%	20	%	60	%

   

Murphy prepared the following product-line income statement based on the data presented above.

   

PACIFIC RIM INDUSTRIES
Segmented Income Statement by Product Lines
For the Fiscal Year Ended April 30, 20x0
	Product Lines
	Furniture				Sports				Appliances				Unallocated				Total
Sales in units		240,000				225,000				240,000
Sales	$	1,440,000			$	4,050,000			$	4,320,000				—			$	9,810,000
Variable manufacturing and selling costs		1,200,000				2,700,000				2,100,000				—				6,000,000
Contribution margin	$	240,000			$	1,350,000			$	2,220,000				—			$	3,810,000
Fixed costs:
Fixed manufacturing overhead	$	109,800			$	247,050			$	192,150			$	—			$	549,000
Depreciation		192,000				180,000				192,000				—				564,000
Administrative and selling expenses		115,000				135,000				75,000				865,000				1,190,000
Total fixed costs	$	416,800			$	562,050			$	459,150			$	865,000			$	2,303,000
Operating income (loss)	$	(176,800	)		$	787,950			$	1,760,850			$	(865,000	)		$	1,507,000

Required:

Prepare a segmented income statement for Pacific Rim Industries based on the company’s geographical areas. The statement should show the operating income for each segment. (Round intermediate calculations to 2 decimal places (i.e. 0.1234 is 12.34%) and final answers to the nearest dollar amount.)

Answer 1

	United States	Canada	Asia	Unallocated	Total
Sales in units
Furniture	96000	48000	96000	0	240000
Sports	90000	90000	45000	0	225000
Appliance	48000	48000	144000		240000
Total unit sales	234000	186000	285000	0	705000
Revenue
Furniture	576000	288000	576000	0	1440000
Sports	1620000	1620000	810000	0	4050000
Appliance	864000	864000	2592000	0	4320000
Total revenue	3060000	2772000	3978000	0	9810000
Variable costs
Furniture	480000	240000	480000	0	1200000
Sports	1080000	1080000	540000	0	2700000
Appliance	648000	648000	1944000	0	3240000
Total variable costs	2208000	1968000	2964000	0	7140000
Contribution margin	852000	804000	1014000	0	2670000
Fixed costs
Manufacturing overhead	169775	151321	227904	0	549000
Depreciation	187200	148800	228000	0	564000
Administrative and selling expenses	55000	95000	245000	795000	1190000
Total fixed costs	411975	395121	700904	795000	2303000
Operating income (loss)	440025	408879	313096	(795000)	367000
Calculations and explanations:
1. Furniture sold in USA = 40% of total furniture sales = 40% of 240,000 = 96,000 units. Similarly other unit figures have been computed.(C=225,000*40%,A=240,000*20%).
2. Revenue = no. of units*price per unit. So revenue from furniture sale in USA = 96,000 units*$6 = 576,000. Similarly other revenues have been computed.
3. Variable cost = no. of units*(variable manufacturing costs+variable selling expenses). For furniture in USA it will be = 96,000 units*($3+$2) = 480,000. Other variable costs have been computed similarly.
4. Fixed manufacturing costs alloted to USA = total variable costs of USA/total variable costs*total fixed manufacturing costs = 2,208,000/7,140,000*549,000 = 169775. Other fixed manufacturing costs have been computed accordingly.
5. Depreciation for USA = total units sold in USA/total units sold*depreciation = 234,000/705,000*564,000 = 187,200. Other depreciation amounts have been computed similarly.
6. Unallocated administrative expenses = 1,190,000 - (55,000+95,000+245,000) = 795,000.