Question

Exercise 7-5 Companywide and Segment Break-Even Analysis [LO7-5]

Piedmont Company segments its business into two regions—North and South. The company prepared the contribution format segmented income statement as shown:

Building Your Skills Analytical Thinking [LO7-4] Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale—a cookbook, a travel guide, and a handy speller. Each book sells for $10. The publishing company’s most recent monthly income statement is shown below. Product Line Total Company Cookbook Travel Guide Handy Speller Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000 Expenses: Printing costs 102,000 27,000 63,000 12,000 Advertising 36,000 13,500 19,500 3,000 General sales 18,000 5,400 9,000 3,600 Salaries 33,000 18,000 9,000 6,000 Equipment depreciation 9,000 3,000 3,000 3,000 Sales commissions 30,000 9,000 15,000 6,000 General administration 42,000 14,000 14,000 14,000 Warehouse rent 12,000 3,600 6,000 2,400 Depreciation—office facilities 3,000 1,000 1,000 1,000 Total expenses 285,000 94,500 139,500 51,000 Net operating income (loss) $ 15,000 $ (4,500 ) $ 10,500 $ 9,000 The following additional information is available: Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales. The same equipment is used to produce all three books, so the equipment depreciation expense has been allocated equally among the three product lines. An analysis of the company’s activities indicates that the equipment is used 30% of the time to produce cookbooks, 50% of the time to produce travel guides, and 20% of the time to produce handy spellers. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 48,000 square feet of space, of which 7,200 square feet is used by the cookbook line, 24,000 square feet by the travel guide line, and 16,800 square feet by the handy speller line. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines. All other costs are traceable to the three product lines in the amounts shown on the income statement above. The management of Diversified Products, Inc., is anxious to improve the publishing company’s 5% return on sales. Required: 1. Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided. 2. Based on the segmented income statements given in the problem, management plans to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. However, based on the new contribution format segmented income statement that you prepared: a. Do you agree with management's plan to eliminate the cookbook? b-1. Compute the contribution margin ratio for each product. b-2. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide? This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.Next Visit question map Question 3 of 3 Total3 of 3

Required:

1. Compute the companywide break-even point in dollar sales.

2. Compute the break-even point in dollar sales for the North region.

3. Compute the break-even point in dollar sales for the South region.

Answer 1

1.

		Product Line
	Total Company	Cookbook	Travel Guide	Handy Speller
Sales	$ 300,000	$ 90,000	$ 150,000	$ 60,000
Variable Costs
Printing Costs	102,000	27,000	63,000	12,000
Sales Commission	30,000	9,000	15,000	6,000
Total Variable Costs	132,000	36,000	78,000	18,000
Contribution Margin	168,000	54,000	72,000	42,000
Traceable Fixed Expenses
Advertising	36,000	13,500	19,500	3,000
Salaries	33,000	18,000	9,000	6,000
Equipment Depreciation	9,000	2,700	4,500	1,800
Warehouse Rent	12,000	1,800	6,000	4,200
Total Traceable Fixed Costs	90,000	36,000	39,000	15,000
Segment Margin	78,000	18,000	33,000	27,000
Common Fixed Expenses
General Sales	18,000
General Administration	42,000
Depreciation: Office Facilities	3,000
Total Common Fixed Expenses	63,000
Net Operating Income ( Loss )	$ 15,000

2.a. No.

2.b-1. Contribution Margin Ratio = Contribution Margin / Sales * 100

	Cookbook	Travel Guide	Handy Speller
Contribution Margin Ratio	60 %	48 %	70 %

2.b-2. No.