1 answer

Problem 7-21 Segment Reporting and Decision-Making [LO7-4] Vulcan Company’s contribution format income statement for June is...

Question:

Problem 7-21 Segment Reporting and Decision-Making [LO7-4]

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

Vulcan Company
Income Statement
For the Month Ended June 30
Sales $ 900,000
Variable expenses 408,000
Contribution margin 492,000
Fixed expenses 455,000
Net operating income $ 37,000

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:

  1. The company is divided into two sales territories—Northern and Southern. The Northern Territory recorded $400,000 in sales and $208,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $164,000 and $125,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories.

  2. The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $150,000 and $250,000, respectively, in the Northern territory during June. Variable expenses are 22% of the selling price for Paks and 70% for Tibs. Cost records show that $67,500 of the Northern Territory’s fixed expenses are traceable to Paks and $60,000 to Tibs, with the remainder common to the two products.

Required:

1-a. Prepare contribution format segmented income statements for the total company broken down between sales territories.

1-b. Prepare contribution format segmented income statements for the Northern Territory broken down by product line.


Answers

Sales Territory
Total Company Northern Southern
Amount % Amount % Amount %
  Sales 900000 100.0% 400000 100.0% 500000 100.0%
  Variable expenses 408000 45.3% 208000 52.0% 200000 40.0%
  Contribution margin 492000 54.7% 192000 48.0% 300000 60.0%
  Traceable fixed expenses 289000 32.1% 164000 41.0% 125000 25.0%
  Sales territory segment margin 203000 22.6% 28000 7.0% 175000 35.0%
  Common fixed expenses 166000 18.4%
  Net operating income 37000 4.1%
1b
Product Line
Northern Territory Paks Tibs
Amount % Amount % Amount %
  Sales 400000 100.0% 150000 100.0% 250000 100.0%
  Variable expenses 208000 52.0% 33000 22.0% 175000 70.0%
  Contribution margin 192000 48.0% 117000 78.0% 75000 30.0%
  Traceable fixed expenses 127500 31.9% 67500 45.0% 60000 24.0%
  Product line segment margin 64500 16.1% 49500 33.0% 15000 6.0%
  Common fixed expenses 36500 9.1%
  Sales territory segment margin 28000 7.0%
.

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