Question

Problem 7-21 Segment Reporting and Decision-Making [LO7-4]

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		408,000
Contribution margin		492,000
Fixed expenses		455,000
Net operating income	$	37,000

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 $208,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $164,000 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 $150,000 and $250,000, respectively, in the Northern territory during June. Variable expenses are 22% of the selling price for Paks and 70% for Tibs. Cost records show that $67,500 of the Northern Territory’s fixed expenses are traceable to Paks and $60,000 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	900000	100.0%	400000	100.0%	500000	100.0%
Variable expenses	408000	45.3%	208000	52.0%	200000	40.0%
Contribution margin	492000	54.7%	192000	48.0%	300000	60.0%
Traceable fixed expenses	289000	32.1%	164000	41.0%	125000	25.0%
Sales territory segment margin	203000	22.6%	28000	7.0%	175000	35.0%
Common fixed expenses	166000	18.4%
Net operating income	37000	4.1%
1b
		Product Line
	Northern Territory		Paks		Tibs
	Amount	%	Amount	%	Amount	%
Sales	400000	100.0%	150000	100.0%	250000	100.0%
Variable expenses	208000	52.0%	33000	22.0%	175000	70.0%
Contribution margin	192000	48.0%	117000	78.0%	75000	30.0%
Traceable fixed expenses	127500	31.9%	67500	45.0%	60000	24.0%
Product line segment margin	64500	16.1%	49500	33.0%	15000	6.0%
Common fixed expenses	36500	9.1%
Sales territory segment margin	28000	7.0%