Question

• Illinois transportation runs passenger and freight services between Chicago airports and downstate cities. The owner, Walter Cruber, is an operations-wise manager. He recently heard about a “segment contribution margin” approach at a university continuing education program. His actual results for the first half of 1998 have just arrived. • Total revenue was $5.0 million, of which $3.5 million was freight traffic and $1.5 million was passenger traffic. Of the passenger revenue, 60 percent was generated by route 1, 30 percent by route 2, and 10 percent by route 3. • Total direct controllable fixed costs were $600,000, of which $500,000 was spent on freight traffic. Of the remainder, $40,000 could not be traced to specific routes, although it was clearly applicable to passenger traffic in general. Routes 1, 2 and 3 incurred costs of $30,000, $18,000 and $12,000m respectively. • Total direct costs not controllable by segment managers were $500,000 of which 80 percent was traceable to freight traffic. Of the 20 percent traceable to passenger traffic, Routes 1, 2 and 3 should be charged $40,000, $20,000 and $15,000, respectively. The balance was not traceable to a specific route. • Total variable costs were $3.2 million, of which $2.0 million was freight traffic. Of the $1.2 million traceable to passenger traffic, $60,000, $400,000 and $130,000 were incurred by routes 1, 2 and 3, respectively. • The common fixed costs not clearly traceable to any part of the company amounted to $500,000. Walter has always allocated these on a percentage of sales basis. REQUIRED: 1. Walter asks you to prepare an earnings statement that shows the performance of each segment of the firm by various types of contribution margin.

Answer 1

Particulars	Freight services	Passanger-Route1	Passanger-Route2	Passanger-Route3
Revenue	3500000	900000	450000	150000
(-) Variable cost(Traceable)	2000000	60000	400000	130000
V.C.(Not traceable apportioned on the basis of revenue)		366000	183000	61000
Contribution margin	1500000	474000	(133000)	(41000)
(-) Direct controllable fixed costs	500000	(40000)	(20000)	(15000)
Segment contribution margin	1000000	434000	(153000)	(66000)

Gross profit total: Freight=1000000

Passanger= 215000- Fixed costs not traceable(40000)= 175000

Gross profit of the company= 1000000+175000= 1175000

(-) Common fixed costs=500000

Net profit of the comapny=675000