Question

Shannon Company segments its income statement into its North and South Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $900,000, 30%, and $18,000, respectively. The North Division’s contribution margin and contribution margin ratio are $102,000 and 34%, respectively. The South Division’s segment margin is $120,000. The company has $180,000 of common fixed expenses that cannot be traced to either division.

Required:

Prepare an income statement for Shannon Company that uses the contribution format and is segmented by divisions. In addition, for the company as a whole and for each segment, show each item on the segmented income statements as a percent of sales. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))

Answer 1

The income statement for both divisions and the company as a whole is shown as follows:-   

Income Statement for Shannon Company (Amounts in $)

	Total Company		North Division		South Division
	Amount	%	Amount	%	Amount	%
Sales	900,000	100%	300,000	100%	600,000	100%
Less: Variable Expense	630,000	70%	198,000	66%	432,000	72%
Contribution Margin	270,000	30%	102,000	34%	168,000	28%
Less: Traceable Fixed Expenses	(72,000)	8%	(24,000)	8%	(48,000)	8%
Territorial Segment Margin	198,000	22%	78,000	26%	120,000	20%
Less: Common Fixed Expenses	(180,000)	20%
Net Operating Income (given)	18,000	2%

Working Notes:-

1) As the sales, contribution margin ratio and net operating income for the total company is given in the question the income statement for the total company can be prepared first. After that north division contribution margin ratio and contribution margin are also given in the question, from this sales and variable cost for north division is calculated. The balances of south division is the difference between the balance for total company and balance for North division.

2) Percentage are based on sale and sales are assumed to be equal to 100%.