Question

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

Vulcan Company

Income Statement

For the Month Ended June 30

Sales $750,000

Variable expenses 336,000

Contribution margin 414,000

Fixed expenses 378,000

Net operating income $36,000

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:

The company is divided into two sales territories—Northern and Southern. The Northern territory recorded $300,000 in sales and $156,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern territory. Fixed expenses of $120,000 and $108,000 are traceable to the Northern and Southern territories, respectively. The rest of the fixed expenses are common to the two territories.

The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $50,000 and $250,000, respectively, in the Northern territory during June. Variable expenses are 22% of the selling price for Paks and 58% for Tibs. Cost records show that $30,000 of the Northern territory’s fixed expenses are traceable to Paks and $40,000 to Tibs, with the remainder common to the two products.

Required: 1. Prepare contribution format segmented income statements first showing the total company broken down between sales territories and then showing the Northern territory broken down by product line. In addition, for the company as a whole and for each segment, show each item on the segmented income statements as a percent of sales. 2. Look at the statement you have prepared showing the total company segmented by sales territory. What insights revealed by this statement should be mentioned to management? 3. Look at the statement you have prepared showing the Northern territory segmented by product lines. What insights revealed by this statement should be mentioned to management?

Answer 1

1)

a)
Income statement- Company
	Northern	Southern	Total
Sales	300,000	450,000	750,000
Less: Variable cost	156,000	180,000	336,000
Contribution	144,000	270,000	414,000
Less: Fixed cost	120,000	108,000	228,000
Less: Attributed Fixed Cost	75,000	75,000	150,000
Profit	-51,000	87,000	36,000
Income Statement- Northern
	Paks	Tibs	Total
Sales	50,000	250,000	300,000
Less: Variable cost	11,000	145,000	156,000
Contribution	39,000	105,000	144,000
Less: Fixed cost	30,000	40,000	70,000
Less: Attributed Fixed Cost	62,500	62,500	125,000
Profit	-53,500	2,500	-51,000
Income Statement - Northern (Percentage of sale)
	Paks	Tibs
Sales	100%	100%
Less: Variable cost	22%	58%
Contribution	78%	42%
Less: Fixed cost	60%	16%
Less: Attributed Fixed Cost	125%	25%
Profit	-107%	1%

2) Analysing both the sales category it is evident that norther territory is producing losses for the company. The contribution margin of the northern territory is 48% as compared to 60% in Southern territory. It is thereby suggested to the management to discard its operations of northern territory to avail more net profits for the company.

3) After reviewing the product-wise sale in northern territory it is noticed that Paks is giving the loss of 53,500 as against 2,500 profit of Tibs. Although Paks is producing net losses, the contribution margin of the product is 78% as compared to 48% of Tibs. A higher contribution margin of Paks depicts more marginal profits to the northern territory. Thereby, it is not suggested to discard the sake of product Paks. It is recommended to produce more units of Paks for availing higher contribution margin.