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		126,250			181,800			126,250			434,300
Average selling price per unit	$	10.00		$	22.00		$	20.00
Average variable manufacturing cost per unit		6.00			10.50			15.70
Average variable selling expense per unit		2.00			2.00			1.70
Fixed manufacturing overhead, excluding depreciation										$	526,000
Depreciation of plant and equipment											347,440
Administrative and selling expense											1,210,000

   

1. 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.

2. 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.

3. 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	$	123,000		United States	$	63,000
Sports		143,000		Canada		103,000
Appliances		83,000		Asia		253,000

   

4. 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	30	%	20	%	50	%
Sports	30	%	30	%	40	%
Appliances	10	%	10	%	80	%

   

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		126,250				181,800				126,250
Sales	$	1,262,500			$	3,999,600			$	2,525,000				—			$	7,787,100
Variable manufacturing and selling costs		1,010,000				2,272,500				2,196,750				—				5,479,250
Contribution margin	$	252,500			$	1,727,100			$	328,250				—			$	2,307,850
Fixed costs:
Fixed manufacturing overhead	$	96,959			$	218,157			$	210,885			$	—			$	526,000
Depreciation		101,000				145,440				101,000				—				347,440
Administrative and selling expenses		123,000				143,000				83,000				861,000				1,210,000
Total fixed costs	$	320,959			$	506,597			$	394,885			$	861,000			$	2,083,440
Operating income (loss)	$	(68,459	)		$	1,220,503			$	-66,635			$	(861,000	)		$	224,410

Required:

1. 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. (Do not round your intermediate calculations and round your final answers to the nearest dollar amount.)

Answer 1

Segment income statement for pacific Rim industries
PACIFIC RIM INDUSTRIES
SEGMENT INCOME STATEMENT
Particulars	United sates	Canada	Asia	Unallocated	Total
Sales in units
Furniture	37875	25250	63125		126250
Sports	54540	54540	72720		181800
Appliances	12625	12625	101000		126250
Total sold units	105040	92415	236845		434300
Sales	($)	($)	($)	($)	($)
Furniture	378750	252500	631250		1262500
Sports	1199880	1199880	1599840		3999600
Appliances	252500	252500	2020000		2525000
Total sales	1831130	1704880	4251090		7787100
Less: variable cost
Manufacturing cost
Furniture	227250	151500	378750		757500
Sports	572670	572670	763560		1908900
Appliances	198212.5	198212.5	1585700		1982125
Total manufactuing cost	998132.5	922382.5	2728010		4648525
Selling cost
Furniture	75750	50500	126250		252500
Sports	109080	109080	145440		363600
Appliances	21462.5	21462.5	171700		214625
Total selling cost	206292.5	181042.5	443390		830725
Total variable cost	1204425	1103425	3171400		5479250
Contribution margin	626705	601455	1079690		2307850
Less: fixed cost
manufcaturing overhead	115623.04	105927.19	304449.77		526000
Depreciation	84032	73932	189476		347440
Administrative and selling expense	63000	103000	253000	791000	1210000
Total fixed cost	262655.04	282859.19	746925.77	791000	2083440
Operating income	364049.96	318595.81	332764.23	-791000	224410

Notes:
calculation of sales units
particulars		United states		canada		Asia
	total sales units	Percentage of total sales	sales in units	Percentage of total sales	sales in units	Percentage of total sales	sales in units
Furniture	126250	30%	37875	20%	25250	50%	63125
Sports	181800	30%	54540	30%	54540	40%	72720
Appliances	126250	10%	12625	10%	12625	80%	101000

Calculation of sales
selling price * sales units
	Unites states	Canada	Asia
Furniture	378750	252500	631250
	(37875*10)	(25250*10)	(63125*10)
Sports	1199880	1199880	1599840
	(54540*22)	(54540*22)	(72720*22)
Appliances	252500	252500	2020000
	(12625*20)	(12625*20)	(101000*20)
Total sales	1831130	1704880	4251090
calculation of variable cost (calculated as above)
Sales units * variable manufcaturing cost
calculation of selling cost (calculated as above)
Sales units * selling cost
Fixed manufcaturing overhead allocation on the bais of total variable cost
Unites states	526000*(1204425/5479250)	115623.04
Canada	526000*(1103425/5479250)	105927.19
Asia	526000*(3171400/5479250)	304449.77
	Total	526000
Depreciation on the basis geographical areas
Unites states	347440*(105040/434300)	84032
Canada	347440*(92415/434300)	73932
Asia	347440*(236845/434300)	189476
		347440