Question

Muscle bound co. sells home exercise equipment. The company has two sales territories, Eastern and Western. Two products are sold in each territory: Fastrak (a Nordic ski stimulator) and Row Master (a stationary rowing machine).

During January, the following data are reported for the eastern territory.

	FasTrak	RowMaster
Sales..............................................	$600,000	$750,000
Contribution margin ratios..........	55%	40%
Traceable fixed costs.................	$80,000	$150,000

Common fixed costs in the Eastern Territory amounted to $120,000 during the month. During January, the Western Territory reported total sales of $600,000, variable costs of $270,000, and a responsibility margin of $200,000. Muscle bound also incurred $180,000 of common fixed costs that were not traceable to either sales territory.

In addition to being profit centers, each territory is also evaluated as an investment center. Average assets utilized by the Eastern and Western territories amount to $14,000,000 and $12,000,000 respectively.

A. Prepare the January income statement for the Eastern territory by product line. Include columns showing percentages as well as dollar amounts.

B. Prepare the January income statement for the company showing profits by sales territories. Conclude your statement with income from operations for the company and with responsibility margins for two territories. Show percentages as well as dollar amounts.

C. Compute the rate of return on average assets earned in each sales territory during the month of January.

D. In part A, your income statement for the eastern territory included $120,000 in common fixed costs. What happened to these common fixed costs in the responsibility income statement shown in part B?

E. The manager of the eastern territory is authorized to spend an additional $50,000 per month to advertise one of the products. On the basis of past experience, the manager estimates that additional advertising will increase the sales of either product by $120,000. On which product should the manager focus this advertising campaign? Explain.

F. Top management is considering investing several million dollars to expand operations in one of its two sales territories. The expansion would increase the traceable fixed costs to the expanded territory in proportion to its increase in sales. Which territory would be the best candidate for this investment? Explain.

Answer 1

A.

Income Statement for Eastern Territory - by product line
	FasTrack		Rowmeter		Total
	Total	%	Total	%	Total	%
Sales	600000	100%	750000	100%	1350000	100%
Variable costs	270000	45%	450000	60%	720000	53%
Contribution margin	330000	55%	300000	40%	630000	47%
Traceable fixed costs	80000	13%	150000	20%	230000	17%
Tracebale net operating income	250000	42%	150000	20%	400000	30%
Common fixed costs					120000	9%
Net operating income					280000	21%

B.

Income Statement for Company - by sales territories
	Eastern		Western		Total
	Total	%	Total	%	Total	%
Sales	1350000	100%	600000	100%	1950000	100%
Variable costs	720000	53%	270000	45%	990000	51%
Contribution margin	630000	47%	330000	55%	960000	49%
Traceable fixed costs	350000	26%	130000	22%	480000	25%
Tracebale net operating income	280000	21%	200000	33%	480000	25%
Common fixed costs					180000	9%
Net operating income					300000	15%

C.

	Territory
	Eastern	Western
Tracebale net operating income	280000	200000
Average assets employed	14000000	12000000
Rate of return on average assets	2.00%	1.67%

D.

The $120,000 common fixed costs from the statement in A, has been inclused in traceable fixed costs for Eastern division, as these are not traceable to the product lines but are traceable to the territory.

E.

Since the contribution margin from Fastrack is higher than RowMaster , the manager should focus on Fastrack.

F.

Since the net operating margin for Western territory at 33% is higher than for Easter territory at 21%, the management shall invest in the Western Terotiry.