Question

Creaston Limited’s most recent monthly contribution format income statement is given below:

CREASTON LIMITED Income Statement For the Month Ended May 31
Sales	$900,000	100.0%
Variable expenses	408,000	45.3
Contribution margin	492,000	54.7
Fixed expenses	465,000	51.7
Operating income	$ 27,000	3.0%

• 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—Central and Eastern. Central Territory recorded $400,000 in sales and $208,000 in variable expenses during May. The remaining sales and variable expenses were recorded in Eastern Territory. Fixed expenses of $160,000 and $130,000 are traceable to Central and Eastern Territories, respectively. The rest of the fixed expenses are common to the two territories.

  2. The company is the exclusive distributor for two products—Kiks and Dows. Sales of Kiks and Dows totalled $100,000 and $300,000, respectively, in Central Territory during May. Variable expenses are 25% of the selling price for Kiks and 61% for Dows. Cost records show that $60,000 of Central Territory’s fixed expenses are traceable to Kiks and $54,000 to Dows, 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 Central Territory broken down by product line. Show both Amount and Percentage columns for the company in total and for each segment. Round percentage computations to one decimal place.

  2. Look at the statement you have prepared showing the total company segmented by sales territory. Which points revealed by this statement should be brought to management’s attention?

  3. Look at the statement you have prepared showing Central Territory segmented by product lines. Which points revealed by this statement should be brought to management’s attention?

     Problem 11-16 (30 minutes) 1. % Sales Territory Total Company Central Eastern Amount % Amount % Amount $900,000 100.0 $400,000 100 408,000 45.3 208,000 52 492,000 54.7 192,000 48 Sales. Variable expenses. Contribution margin. Traceable fixed expenses. Territorial segment margin Common fixed expenses* Operating income $ 27,000 3.0 Central Territory Amount % $400,000 100.0 208,000 52.0 192,000 48.0 Product Line Kiks Dows Amount % Amount % $100,000 100 $300,000 100 25,000 25 61 75,000 75 Sales...... Variable expenses. Contribution margin Traceable fixed expenses.... Product line segment margin Common fixed expenses*.... Sales territory segment margin...

Answer 1

1.

				Sales Territory
		Total Company		Central		Eastern
		Amount	%		Amount	%		Amount	%
	Sales.....................................................................	$900,000	100.0		$400,000	100		$500,000	100
	Variable expenses.................................................	408,000	45.3		208,000	52		200,000	40
	Contribution margin............................................	492,000	54.7		192,000	48		300,000	60
	Traceable fixed expenses.....................................	290,000	32.2		160,000	40		130,000	26
	Territorial segment margin...................................	202,000	22.4		$ 32,000	8		$170,000	34
	Common fixed expenses*...................................	175,000	19.4
	Operating income................................................	$ 27,000	3.0
	*465,000 – $290,000 = $175,000.

				Product Line
		Central Territory		Kiks		Dows
		Amount	%		Amount	%		Amount	%
	Sales.....................................................................	$400,000	100.0		$100,000	100		$300,000	100
	Variable expenses.................................................	208,000	52.0		25,000	25		183,000	61
	Contribution margin............................................	192,000	48.0		75,000	75		117,000	39
	Traceable fixed expenses.....................................	114,000	28.5		60,000	60		54,000	18
	Product line segment margin...............................	78,000	19.5		$ 15,000	15		$ 63,000	21
	Common fixed expenses*...................................	46,000	11.5
	Sales territory segment margin............................	$ 32,000	8.0
	*$160,000 – $114,000 = $46,000.

2.

Two points should be brought to the attention of management. First, compared to the Eastern territory, the Central territory has a low contribution margin ratio. Second, the Central territory has high traceable fixed expenses. Overall, compared to the Eastern territory, the Central territory is very weak.

3.   

Again, two points should be brought to the attention of management. First, the Central territory has a poor sales mix. Note that the territory sells very little of the Kiks product, which has a high contribution margin ratio. It is this poor sales mix that accounts for the low overall contribution margin ratio in the Central territory mentioned in part (2) above. Second, the traceable fixed expenses of the Kiks product seem very high in relation to sales. These high fixed expenses may simply mean that the Kiks product is highly leveraged; if so, then an increase in sales of this product line would greatly enhance profits in the Central territory and in the company as a whole.