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 simulator) and RowMaster (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.

Required:

a. Prepare the January income statement for the Eastern territory by product line.

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 the two territories.

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

e-1. The manager of the Eastern territory is authorized to spend an additional $50,000 per month to advertise one of the products. Based on past experience, the manager estimates that additional advertising will increase the sales of either product by $120,000?

e-2. On which product should the manager focus this advertising campaign?

Answer 1

SOLUTION:-

a

Muscle Bound Co.
Income Statement
Eastern Territory
For the month ended January 31
	Fas Trak	RowMaster	Total
Sales Revenue	$ 600,000	$ 750,000	$ 1,350,000
Less: Variable Costs	270,000	450,000	720,000
Contribution Margin	$ 330,000	$ 300,000	630,000
Less: Traceable Fixed Costs	80,000	150,000	230,000
Product Margin	$ 250,000	$ 150,000	$ 400,000
Common Fixed Costs	0	0	120,000
Net Operating Income			$ 280,000

b.

Muscle Bound Co.
Income Statement
For the month ended January 31
	Eastern Territory	Western Territory	Total
	$	$	$
Sales Revenue	1,350,000	600,000	1,950,000
Less: Variable Costs	720,000	270,000	990,000
Contribution Margin	630,000	330,000	960,000
Less: Traceable Fixed Costs	230,000	130,000	360,000
Responsibility Margin	400,000	200,000	600,000
Common Fixed Costs			300,000
Income from Operations			$ 300,000

c

	Eastern Territory	Western Territory
Income from Operations	$ 280,000	$ 20,000
Average Assets	14,000,000	12,000,000
Rate of return on Average Assets	2 %	0.17%

e-1. Increase (decrease) in profit for FasTrak = $ 120,000 x 55% - $ 50,000 = $ 16,000.

increase (decrease) in profit for RowMaster = $ 120,000 x 40% - $ 50,000 = $ (2,000)

e-2. The manager should fous the advertising campaign on FasTrak.

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