Question

Flash in a Flash sells three types of digital memory devices: Secure Digital (SD), CompactFlash (CF), and

Memory Sticks (MS). The following table reveals average per unit selling price, average per unit variable

product cost, and the number of units sold during a recent period:

Selling Price Variable Product Cost Units Sold

	Selling Price	Variable Product Cost	Units Sold
SD	24	16	220,000
CF	21	11	170,000
MS	38	31	370,000

Each product is managed by a product manager who is compensated with a fixed salary, as follows:

SD $170,000

CF $185,000

MS $170,000

The product managers are each authorized to engage a sales strategy. SD's strategy is to rely exclusively on a manufacturer representative. The manufacturer representative is paid 10% of sales. CF's strategy is to utilize a salaried sales manager and print media advertising campaign at a fixed cost of $240,000. MS's strategy is use an internet site at a fixed cost of $230,000, plus $0.20 per click. The click rate is 30 times the number of units sold.

Of the above costs, the product manager's salary is considered to be an uncontrollable fixed cost for each

unit. The only other costs are general and administrative costs incurred at the corporate level. These costs of $280,000 are not traced to any particular product.

(a) Prepare a contribution income statement for each segment, revealing the segment margin.

(b) Prepare a "company total" contribution income statement for all three segments.

(c) Evaluate Flash in a Flash's results, and comment as to why corporate management should look at segmented results in addition to overall corporate performance.

Answer 1

1. Each Segment wise contribution statement and segment margin statement.

Here the segment of Memory sticks is having less margin as compared to other two divisions, due to its higher variable cost per unit

	Secured Digital	compact flash	Memory sticks
Units sold	220000	170000	370000
Selling price	24	21	38
Sales	5280000	3570000	14060000
Less: Variable Cost
Variable product cost	3520000	1870000	11470000
Variable manufacturer representative cost	528000
Variable selling cost per click (370000*30* 0.2)			2220000
Total Variable cost	4048000	1870000	13690000
Contribution Margin	1232000	1700000	370000
Less: Fixed cost
Sales manager salary & Advertisement cost		240000
Internet site cost			230000
Product Managers salary	170000	185000	170000
Total Fixed cost	170000	425000	400000
Operating Profit/Loss	1062000	1275000	(-30000)

2. Company's total contribution statement:

Company's Total Contribution statement
	Company	Secured Digital	compact flash	Memory sticks
Units sold		220000	170000	370000
Selling price		24	21	38
Sales	22910000	5280000	3570000	14060000
Less: Variable Cost
Variable product cost	16860000	3520000	1870000	11470000
Variable manufacturer representative cost	528000	528000
Variable selling cost per click	2220000			2220000
Total Variable cost	19608000	4048000	1870000	13690000
Contribution Margin	3302000	1232000	1700000	370000
Less: Allocable Fixed cost
Sales manager salary & Advertisement cost	240000		240000
Internet site cost	230000			230000
Product Managers salary	525000	170000	185000	170000
Total Fixed cost	995000	170000	425000	400000
Segment wise operating profit	2307000	1062000	1275000	-30000
Less: Common general and administrative cost	280000
Operating profit for company	2027000

3. The overall profit of the company is $2027000, which shows the good profit for the company as a whole but once we look at the divisions profit , the division with highest profit margin is Division Compact Flash, even it sales seller quantity, due to its lower variable cost .And the division memory sticks has a negative overall profit even it is selling the highest number of units, due to its higher variable cost per uniit.

The loss of division memory sticks is not much huge but considerable for company as a whole because it is reducing the companies overall profitability. The company should increase the efficiency of department memory sticks to maintain a high profitable growth.