Question

Problem 7-21 Segment Reporting and Decision-Making [LO7-4]

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

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	800,000
Variable expenses		308,000
Contribution margin		492,000
Fixed expenses		480,000
Net operating income	$	12,000

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 $224,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $160,000 and $104,000 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 $100,000 and $300,000, respectively, in the Northern territory during June. Variable expenses are 26% of the selling price for Paks and 66% for Tibs. Cost records show that $46,000 of the Northern Territory’s fixed expenses are traceable to Paks and $78,000 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.

Prepare contribution format segmented income statements for the Northern Territory broken down by product line. (Round your percentage answers to 1 decimal place (i.e. 0.1234 should be entered as 12.3).)

	Product Line Northern Territory Paks Tibs Amount % Amount % Amount % Sales $400,000 100.0 $100,000 100.0 $300,000 100.0 Variable expenses 26,000 26.0 198,000 66.0 Contribution margin 400,000 100.0 74,000 74.0 102,000 34.0 Traceable fixed expenses Product line segment margin 400,000 100.0 $74,000 74.0 $102,000 34.0 Common fixed expenses Sales territory segment margin $400,000 100.0

I need the calculations for all the blank spots

Answer 1

Solution

Vulcan Company

1a. Contribution format segmented income statements for the total company broken down between sales territories:

	Total Company		Sales Territory
			Northern		Southern
	Amount	Percent	Amount	Percent	Amount	Percent
Sales	$800,000	100%	$400,000	100%	$400,000	100%
Variable Expenses	$308,000	38.50%	$224,000	56%	$84,000	21%
Contribution Margin	$492,000	61.50%	$176,000	44%	$316,000	79%
Traceable fixed expenses	$264,000	33%	$160,000	40%	$104,000	26%
Territorial Segment Margin	$228,000	28.50%	$16,000	4%	$212,000	53%
Common Fixed Expenses	$216,000	27%
Net Operating Income	$12,000	1.5%

Computations:

Variable expenses of Southern –

= 308,000 – 224,000 = 84,000

Sales of southern –

800,000 – 400,000 = 400,000

Common fixed expenses = total fixed expenses – total traceable fixed expenses.

480,000 – (160,000 + 104,000) = $216,000

1b. Contribution format segmented income statements for the Northern Territory broken down by product line:

	Northern Territory		Sales Territory
			Paks		Tibs
	Amount	Percent	Amount	Percent	Amount	Percent
Sales	$400,000	100%	$100,000	100%	$300,000	100%
Variable Expenses	$224,000	56%	$26,000	26%	$198,000	66%
Contribution Margin	$176,000	44%	$74,000	74%	$102,000	34%
Traceable fixed expenses	$124,000	31%	$46,000	46%	$78,000	26%
Product line segment margin	$52,000	13%	$28,000	28%	$24,000	8%
Common Fixed Expenses	$36,000	9%
Net Operating Income	$16,000	4%

Computations:

Common fixed expenses = total fixed expenses of territory – traceable fixed expenses for product lines

= $160,000 – (46,000 + 78,000) = $36,000