Severo S.A. of Sao Paulo, Brazil, is organized into two
divisions. The company’s contribution format segmented income
statement (in terms of the Brazilian currency, the real, R) for
last month is given below:
Divisions | |||||||||
Total Company |
Cloth | Leather | |||||||
Sales | R | 5,040,000 | R | 2,800,000 | R | 2,240,000 | |||
Variable expenses | 2,224,000 | 1,150,000 | 1,074,000 | ||||||
Contribution margin | 2,816,000 | 1,650,000 | 1,166,000 | ||||||
Traceable fixed expenses: | |||||||||
Advertising | 875,000 | 490,000 | 385,000 | ||||||
Selling and administrative | 636,000 | 400,000 | 236,000 | ||||||
Depreciation | 267,000 | 134,000 | 133,000 | ||||||
Total traceable fixed expenses | 1,778,000 | 1,024,000 | 754,000 | ||||||
Divisional segment margin | 1,038,000 | R | 626,000 | R | 412,000 | ||||
Common fixed expenses | 409,000 | ||||||||
Operating income | R | 629,000 | |||||||
Top management can’t understand why the Leather
Division has such a low segment margin when its sales are only 20%
less than sales in the Cloth Division. As one step in isolating the
problem, management has directed that the Leather Division be
further segmented into product lines. The following information is
available on the product lines in the Leather Division:
Leather Division Product Lines | |||||||||
Garments | Shoes | Handbags | |||||||
Sales | R | 700,000 | R | 900,000 | R | 640,000 | |||
Traceable fixed expenses: | |||||||||
Advertising | R | 67,000 | R | 131,000 | R | 187,000 | |||
Selling and administrative | R | 49,000 | R | 54,000 | R | 61,000 | |||
Depreciation | R | 38,000 | R | 75,000 | R | 20,000 | |||
Variable expenses as a percentage of sales | 60 | % | 30 | % | 60 | % | |||
Analysis shows that R72,000 of the Leather Division’s selling and
administrative expenses are common to the product lines.
Required:
1.Prepare a contribution format segmented income statement
for the Leather Division, with segments defined as product
lines.
2. Management is surprised by the handbag
product line’s poor showing and would like to have the product line
segmented by market. The following information is available about
the markets in which the handbag line is sold:
Handbag Markets | ||||||
Domestic | Foreign | |||||
Sales | R | 400,000 | R | 240,000 | ||
Traceable fixed expenses: | ||||||
Advertising | R | 68,000 | R | 119,000 | ||
Variable expenses as a percentage of sales | 42 | % | 90 | % | ||
All of the handbag product line’s selling and administrative
expenses and depreciation are common to the markets in which the
product is sold. Prepare a contribution format segmented income
statement for the handbag product line with segments defined as
markets.
3. Refer to the statement prepared in (1) above. The sales manager wants to run a special promotional campaign on one of the product lines over the next month. A marketing study indicates that such a campaign would increase sales of the Garments product line by R219,000 or sales of the shoes product line by R164,000. The campaign would cost R34,000.
a. Compute the increased operating income for
these product lines for the expected increased sales.
1.Prepare a contribution format segmented income statement for the Leather Division, with segments defined as product lines. | ||||
Product Line | ||||
Leather Division | Garments | Shoes | Handbags | |
Sales | R$ 2,240,000.00 | R$ 700,000.00 | R$ 900,000.00 | R$ 640,000.00 |
Variable expenses = % of Sales | R$ 1,074,000.00 | R$ 420,000.00 | R$ 270,000.00 | R$ 384,000.00 |
Contribution Margin | R$ 1,166,000.00 | R$ 280,000.00 | R$ 630,000.00 | R$ 256,000.00 |
Traceable fixed expenses: | ||||
Advertising | R$ 385,000.00 | R$ 67,000.00 | R$ 131,000.00 | R$ 187,000.00 |
Selling and administrative | R$ 164,000.00 | R$ 49,000.00 | R$ 54,000.00 | R$ 61,000.00 |
Depreciation | R$ 133,000.00 | R$ 38,000.00 | R$ 75,000.00 | R$ 20,000.00 |
Total | R$ 682,000.00 | R$ 154,000.00 | R$ 260,000.00 | R$ 268,000.00 |
Product line segment Margin |
R$ 484,000.00 | R$ 126,000.00 | R$ 370,000.00 | -R$ 12,000.00 |
Common fixed expenses not traceable to product lines: |
||||
Selling and Administrative Expenses | R$ 72,000.00 | |||
Divisional segment margin | R$ 412,000.00 | |||
2. Management is surprised by the handbag product line’s poor showing and would like to have the product line segmented by market. The following information is available about the markets in which the handbag line is sold: | ||||
Handbag Markets | Domestic | Foreign | ||
Sales | R$ 640,000.00 | R$ 400,000.00 | R$ 240,000.00 | |
Variable expenses | R$ 384,000.00 | R$ 168,000.00 | R$ 216,000.00 | |
Contribution Margin | R$ 256,000.00 | R$ 232,000.00 | R$ 24,000.00 | |
Traceable fixed expenses: | ||||
Advertising | R$ 187,000.00 | R$ 68,000.00 | R$ 119,000.00 | |
Market segment margin | R$ 69,000.00 | R$ 164,000.00 | -R$ 95,000.00 | |
Common fixed expenses not traceable to sales markets: | ||||
Depreciation | R$ 20,000.00 | |||
selling and administrative expenses | R$ 61,000.00 | |||
Total | R$ 81,000.00 | |||
Product line segment margin. | -R$ 12,000.00 | |||
3. Refer to the statement prepared in (1) above. The sales manager wants to run a special promotional campaign on one of the product lines over the next month. A marketing study indicates that such a campaign would increase sales of the Garments product line by R219,000 or sales of the shoes product line by R164,000. The campaign would cost R34,000. | ||||
a. Compute the increased operating income for these product lines for the expected increased sales. | ||||
Garments | Shoes | |||
Increased sales | $ 219,000.00 | $ 164,000.00 | ||
Contribution margin ratio: (280,000/$700,000);($630,000/$900,000) | 40% | 70% | ||
Incremental contribution margin | R$ 87,600.00 | R$ 114,800.00 | ||
Less cost of the promotional campaign | R$ 34,000.00 | R$ 34,000.00 | ||
Increased net operating income | R$ 53,600.00 | R$ 80,800.00 | ||
Based on these data, the campaign should be directed toward shoes product line |
Severo S.A. of Sao Paulo, Brazil, is organized into two divisions. The company’s contribution format segmented...
Severo S.A. of Sao Paulo, Brazil, is organized into two divisions. The company’s contribution format segmented income statement (in terms of the Brazilian currency, the real, R) for last month is given below: Divisions Total Company Cloth Leather Sales R 1,770,700 R 2,050,000 R 1,640,000 Variable expenses 3,690,000 970,000 800,700 Contribution margin 1,919,300 1,080,000 839,300 Traceable fixed expenses: Advertising 623,000 310,000 313,000 Selling and administrative 438,000 220,000 218,000 Depreciation 231,000 116,000 115,000 Total traceable fixed expenses 1,292,000 646,000 646,000 Divisional...
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