Question

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

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	900,000
Variable expenses		400,000
Contribution margin		500,000
Fixed expenses		470,000
Net operating income	$	30,000

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 $400,000 in sales and $200,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $172,000 and $135,000 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 $200,000 and $200,000, respectively, in the Northern territory during June. Variable expenses are 26% of the selling price for Paks and 74% for Tibs. Cost records show that $94,000 of the Northern Territory’s fixed expenses are traceable to Paks and $42,000 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

1-a.
			Sales territory
	Total company		Northern		Southern
	Amount	%	Amount	%	Amount	%
Sales	900000	100.0%	400000	100.0%	500000	100.0%
Variable expenses	400000	44.4%	200000	50.0%	200000	40.0%
Contribution margin	500000	55.6%	200000	50.0%	300000	60.0%
Traceable fixed expenses	307000	34.1%	172000	43.0%	135000	27.0%
Territorial segment margin	193000	21.4%	28000	7.0%	165000	33.0%
Common fixed expenses ( 470000 - 307000 )	163000	18.1%
Net operating income	30000	3.3%

1-b.
			Product line
	Northern Territory		Paks		Tibs
	Amount	%	Amount	%	Amount	%
Sales	400000	100.0%	200000	100.0%	200000	100.0%
Variable expenses	200000	50.0%	52000	26.0%	148000	74.0%
Contribution margin	200000	50.0%	148000	74.0%	52000	26.0%
Traceable fixed expenses	136000	34.0%	94000	47.0%	42000	21.0%
Product line segment margin	64000	16.0%	54000	27.0%	10000	5.0%
Common fixed expenses ( 172000 - 136000 )	36000	9.0%
Sales territory segment margin	28000	7.0%