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		216,000			202,500			216,000			634,500
Average selling price per unit	$	7.00		$	18.00		$	17.00
Average variable manufacturing cost per unit		3.00			9.50			11.50
Average variable selling expense per unit		2.00			2.50			2.75
Fixed manufacturing overhead, excluding depreciation										$	528,000
Depreciation of plant and equipment											507,600
Administrative and selling expense											1,180,000

   

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	$	140,000		United States	$	80,000
Sports		160,000		Canada		120,000
Appliances		100,000		Asia		270,000

   

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	50	%	10	%	40	%
Sports	40	%	40	%	20	%
Appliances	30	%	30	%	40	%

   

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		216,000				202,500				216,000
Sales	$	1,512,000			$	3,645,000			$	3,672,000				—			$	8,829,000
Variable manufacturing and selling costs		1,080,000				2,430,000				1,890,000				—				5,400,000
Contribution margin	$	432,000			$	1,215,000			$	1,782,000				—			$	3,429,000
Fixed costs:
Fixed manufacturing overhead	$	105,600			$	237,600			$	184,800			$	—			$	528,000
Depreciation		172,800				162,000				172,800				—				507,600
Administrative and selling expenses		140,000				160,000				100,000				780,000				1,180,000
Total fixed costs	$	418,400			$	559,600			$	457,600			$	780,000			$	2,215,600
Operating income (loss)	$	(13,600	)		$	655,400			$	1,324,400			$	(780,000	)		$	1,213,400

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.)

PACIFIC RIM INDUSTRIES Segmented Income Statement by Geographic Areas For the Fiscal Year Ended April 30, 20x0 Geographic Areas United States Canada Asia Unallocated Total Sales in units Furniture 0 Sports 0 Appliances 0 Total unit sales 0 0 0 0 Revenue Furniture $0 Sports 0 Appliances 0 Total revenue $0 $0 $0 $0 Variable costs Furniture $0 Sports 0 Appliances 0 Total variable costs $0 $0 $0 $0 Contribution margin $0 $0 $0 $0 Fixed costs Manufacturing overhead $0 Depreciation 0 Administrative and selling expenses 0 Total fixed costs $0 $0 $0 $0 Operating income (loss) $0 $0 $0 $0 $0

Answer 1

Solution:

PACIFIC RIM INDUSTRIES
Segmented Income Statement by Geographic Areas
For the Fiscal Year Ended April 30, 20x0
	Geographic Areas
	United States	Canada	Asia	Unallocated	Total
Sales in units (WN1)
Furniture	108,000	21,600	86,400		216,000
Sports	81,000	81,000	40,500		202,500
Appliances	64,800	64,800	86,400		216,000
Total unit sales	253,800	167,400	213,300		634,500
Revenue(WN2)
Furniture	756,000	151,200	604,800		$1,512,000
Sports	1,458,000	1,458,000	729,000		3,645,000
Appliances	1,101,600	1,101,600	1,468,800		3,672,000
Total revenue	$3,315,600	$2,710,800	$2,802,600		$8,829,000
Variable costs(WN3)
Furniture	540,000	108,000	432,000		$1,080,000
Sports	972,000	972,000	486,000		2,430,000
Appliances	567,000	567,000	756,000		1,890,000
Total variable costs	$2,079,000	$1,647,000	$1,674,000		$5,400,000
Contribution margin (Total Revenue – Total Variable Cost)	$1,236,600	$1,063,800	$1,128,600		$3,429,000
Fixed costs(WN4)
Manufacturing overhead	203,280	161,040	163,680		$528,000
Depreciation	203,040	133,920	170,640		507,600
Administrative and selling expenses	80,000	120,000	270,000	710,000	1,180,000
Total fixed costs	$486,320	$414,960	$604,320	710,000	$2,215,600
Operating income (loss)	$750,280	$648,840	$524,280	($710,000)	$ 1,213,400

Working Note (WN):

1) Sales in unit = Allocated in the given ratio:

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

	Percentage of Unit Sales
	United States (Units)		Canada (Units)		Asia (Units)
Furniture (216,000 units)	50%	108,000	10%	21,600	40%	86,400
Sports (202,500 units)	40%	81,000	40%	81,000	20%	40,500
Appliances (216,000)	30%	64,800	30%	64,800	40%	86,400

2) Revenue = on the basis of above allocated units:

	Revenue
	United States ($)		Canada ($)		Asia ($)
Furniture ( Selling Price $ 7 per unit)	108,000	756,000	21,600	151,200	86,400	604,800
Sports ( Selling Price $ 18 per unit)	81,000	1,458,000	81,000	1,458,000	40,500	729,000
Appliances ( Selling Price $ 17 per unit)	64,800	1,101,600	64,800	1,101,600	86,400	1,468,800

3) Variable manufacturing and selling costs = Variable cost is that cost that varies according to the number of units produced. In this question, all the units produced are sold. So, variable cost will be allocated in the ration given for units sold.

	Allocation of Variable manufacturing and selling cost
	United States ($)		Canada ($)		Asia ($)
Furniture ($ 1,080,000)	50%	540,000	10%	108,000	40%	432,000
Sports ( $ 2,430,000)	40%	972,000	40%	972,000	20%	486,000
Appliances ( $ 1,890,000)	30%	567,000	30%	567,000	40%	756,000

4)

(a)Manufacturing overhead (Given) 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 .The total variable cost is $2,079,000, $1,647,000 and $1,674,000 for United states, Canada and Asia respectively. So, the ratio without simplifying is 2079: 1647: 1674. For the calculation denominator will be (2079 + 1647 + 1674= 5,400).

	Allocation of Fixed Manufacturing overhead
	United States ($)	Canada ($)	Asia ($)
Fixed Manufacturing overhead ($ 528,000)	=528,000  X 2079/ 5400 = $ 203,280	=528,000 X 1647/ 5400 = $ 161,040	= 528,000 X 1674/ 5400 = $ 163,680

(b)Depreciation (Given) 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.

The total units produced are 253,800, 167,400 and 213,300for United States, Canada and Asia respectively. So, the ratio without simplifying is 2538: 1674: 2133. For the calculation denominator will be (2538 + 1647 + 2133= 6,345).

	Allocation of Depreciation
	United States ($)	Canada ($)	Asia ($)
Depreciation ($ 507,600)	=507,600X 2538/ 6,345 = $ 203,040	=507,600X 1674/ 6,345 = $ 133,920	= 507,600X 2133/ 6,345 = $ 170,640

(c) Administrative and selling expenses (Given): 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.

So, Sales staff expenses are allocated to United States, Canada and Asia is $ 80,000, $ 120,000 and $ 270,000 respectively. So, Total allocated cost is $ 470,000

Unallocated Cost= Total Administrative and selling expenses – Allocated Cost

                             = $ 1,180,000 - $ 470,000

                             = $ 710,000