Question

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

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	900,000
Variable expenses		400,000
Contribution margin		500,000
Fixed expenses		460,000
Net operating income	$	40,000

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 $180,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $208,000 and $125,000 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 $120,000 and $280,000, respectively, in the Northern territory during June. Variable expenses are 24% of the selling price for Paks and 54% for Tibs. Cost records show that $52,800 of the Northern Territory’s fixed expenses are traceable to Paks and $53,200 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.

Answer 1

					Sales Territory
			total company		Northern		Southern
			Amount	%	Amount	%	Amount	%
Sales			900,000	100.0%	400,000	100.0%	500,000	100.0%
variable expenses			400,000	44.4%	180,000	45.0%	220,000	44.0%
contribution margin			500,000	55.6%	220,000	55.0%	280,000	56.0%
Traceable fixed expenses			333,000	37.0%	208,000	52.0%	125,000	25.0%
sales territory segment margin			167,000	18.6%	12,000	3.0%	155,000	31.0%
common fixed expense			127,000	14.1%
net operating income			40,000	4.4%
					Product line
			Northern territory		paks		Tibs
			Amount	%	Amount	%	Amount	%
Sales			400,000	100.0%	120,000	100.0%	280,000	100.0%
variable expenses			180,000	45.0%	28,800	24.0%	151,200	54.0%
contribution margin			220,000	55.0%	91,200	76.0%	128,800	46.0%
Traceable fixed expenses			106,000	26.5%	52,800	44.0%	53,200	19.0%
sales territory segment margin			114,000	28.5%	38,400	32.0%	75,600	27.0%
common fixed expense			102,000
net operating income			12,000