Question

Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The company’s major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacific Rim’s board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement.

Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings.

	Product Lines
	Furniture			Sports			Appliances			Total
Production and sales in units		170,000			212,500			170,000			552,500
Average selling price per unit	$	9.00		$	20.00		$	20.00
Average variable manufacturing cost per unit		4.00			10.20			14.50
Average variable selling expense per unit		3.00			2.40			2.25
Fixed manufacturing overhead, excluding depreciation										$	562,000
Depreciation of plant and equipment											442,000
Administrative and selling expense											1,180,000

   

The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.

Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.

There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.

Manufacturing Staff				Sales Staff
Furniture	$	125,000		United States	$	65,000
Sports		145,000		Canada		105,000
Appliances		85,000		Asia		255,000

   

The division managers were able to provide reliable sales percentages for their product lines by geographical area.

	Percentage of Unit Sales
	United States		Canada		Asia
Furniture	40	%	20	%	40	%
Sports	40	%	40	%	20	%
Appliances	30	%	30	%	40	%

   

Murphy prepared the following product-line income statement based on the data presented above.

   

PACIFIC RIM INDUSTRIES
Segmented Income Statement by Product Lines
For the Fiscal Year Ended April 30, 20x0
	Product Lines
	Furniture				Sports				Appliances				Unallocated				Total
Sales in units		170,000				212,500				170,000
Sales	$	1,530,000			$	4,250,000			$	3,400,000				—			$	9,180,000
Variable manufacturing and selling costs		1,190,000				2,677,500				2,082,500				—				5,950,000
Contribution margin	$	340,000			$	1,572,500			$	1,317,500				—			$	3,230,000
Fixed costs:
Fixed manufacturing overhead	$	112,400			$	252,900			$	196,700			$	—			$	562,000
Depreciation		136,000				170,000				136,000				—				442,000
Administrative and selling expenses		125,000				145,000				85,000				825,000				1,180,000
Total fixed costs	$	373,400			$	567,900			$	417,700			$	825,000			$	2,184,000
Operating income (loss)	$	(33,400	)		$	1,004,600			$	899,800			$	(825,000	)		$	1,046,000

Required:

Prepare a segmented income statement for Pacific Rim Industries based on the company’s geographical areas. The statement should show the operating income for each segment. (Round intermediate calculations to 2 decimal places (i.e. 0.1234 is 12.34%) and final answers to the nearest dollar amount.)

Answer 1

Segmented Income Statement ( in $)
Based on Geographical Areas
	United States	Canada	Mexico	Unallocated	Total
Sales (in Units)
Furniture (40%:20%:40%)	68000	34000	68000		170000
Sports (40%:40%:20%)	85000	85000	42500		212500
Appliances (30%:30%:40%)	51000	51000	68000		170000
Total Unit Sales	204000	170000	178500		552500
Revenue
Furniture@ $9	612000	306000	612000		1530000
Sports @$20	1700000	1700000	850000		4250000
Appliances @20	1020000	1020000	1360000		3400000
Total Revenue	3332000	3026000	2822000	-	9180000
Variable Costs
Furniture @ $7	476000	238000	476000		1190000
Sports @12.60	1071000	1071000	535500		2677500
Appliances @ $16.75	854250	854250	1139000		2847500
Total Variable Costs	2401250	2163250	2150500	-	6715000
Contribution Margin	930750	862750	671500	-	2465000
Fixed Costs
Fixed Production Overhead	200968	181049	179982		562000
Depreciation	163200	136,000	142800		442000
Administrative & Selling Exp.	65000	105000	255000	755000	1180000
Total Fixed Cost	429168	422049	577782	755000	2184000
Operating Income (Loss)	501582	440701	93718	-755000	281000