Question

Problem 6-21A Segment Reporting and Decision Making [LO6-4]

Vulcan Company’s contribution format income statement for June is given below:

  

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	900,000
Variable expenses		400,000
Contribution margin		500,000
Fixed expenses		475,000
Net operating income	$	25,000

  

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:

  

a.	The company is divided into two sales territories—Northern and Southern. The Northern Territory recorded $400,000 in sales and $160,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $176,000 and $140,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories.
b.	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 27% of the selling price for Paks and 47% for Tibs. Cost records show that $67,200 of the Northern Territory’s fixed expenses are traceable to Paks and $57,200 to Tibs, with the remainder common to the two products.

  

Required:

1a.	Prepare contribution format segmented income statements for the total company broken down between sales territories. (Round the percentage answers to one decimal place (i.e .1234 should be entered as 12.3))

       

1b.	Prepare contribution format segmented income statements for the Northern Territory broken down by product line. (Round the percentage answers to one decimal place (i.e .1234 should be entered as 12.3))

      

Answer 1

		Sales Territory
	Total Company		Northern		Southern
	Amount	%	Amount	%	Amount	%
Sales	$900,000	100.0%	400000	100.0%	$500,000	100.0%
Variable expenses	$400,000	44.4%	160,000	40.0%	240,000	48.0%
Contribution margin	$500,000	55.6%	240,000	60.0%	260,000	52.0%
Traceable fixed expenses	$316,000	35.1%	176,000	44.0%	140,000	28.0%
Sales territory segment margin	$184,000	20.4%	$64,000	16.0%	$120,000	24.0%
Common fixed expenses	159,000	17.7%
Net operating income	$25,000	2.8%
		Product Line
	Northern Territory		Paks		Tibs
	Amount	%	Amount	%	Amount	%
Sales	$400,000	100.0%	140000	100.0%	260000	100.0%
Variable expenses	$160,000	40.0%	37,800	27.0%	122,200	47.0%
Contribution margin	$240,000	60.0%	102,200	73.0%	137,800	53.0%
Traceable fixed expenses	$124,400	31.1%	67,200	48.0%	57,200	22.0%
Product line segment margin	$115,600	28.9%	$35,000	25.0%	$80,600	31.0%
Common fixed expenses	51,600	12.9%
Sales territory segment margin	$64,000	16.0%