Question

Income Statements Segmented by Territory

Script, Inc., has two product lines. The September income statements of each product line and the company are as follows:

SCRIPT, INC. Product Line and Company Income Statements For Month of September

	Pens	Pencils	Total
Sales	$25,000	$30,000	$55,000
Less variable expenses	(10,000)	(12,000)	(22,000)
Contribution margin	15,000	18,000	33,000
Less direct fixed expenses	(7,000)	(6,000	(13,000)
Product margin	$8,000	$12,000	$20,000
Less common fixed expenses			(6,000)
Net income			$14,000

Pens and pencils are sold in two territories, Florida and Alabama, as follows:

	Florida	Alabama
Pen sales	$18,000	$7,000
Pencil sales	6,000	24,000
Total sales	$24,000	$31,000

The preceding common fixed expenses are traceable to each territory as follows:

Florida fixed expenses $2,000

Alabama fixed expenses 3,000

Home office administration fixed expenses 1,000

Total common fixed expenses $6,000

The direct fixed expenses of pens, $7,000, and of pencils, $6,000, cannot be identified with either territory. The company's accountants were unable to allocate any of the common fixed expenses to the various segments.

Prepare income statements segmented by territory for September, including a column for the entire firm. Do not use negative signs with your answers.

Script, Inc. Territory and Company Income Statements For the Month of September

	Florid	Alabama	Compant totals
Sales
Pens
Pencils
Total sales
Variable costs
Pens
Pencils
Total
Contribution margin
Direct fixed expenses
Territory margin

Common fixed expenses:

Pens ......			Answer
Pencils ......			Answer
Home office	......		Answer
Total .......			Answer
Net income .......

b) Why are the direct expenses of one type of segment report not necessarily the direct expenses of another type of segment report?

Because direct expenses are all variable costs.

Because only fixed expenses are direct costs.

Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product).

Because management must decide which costs are direct and which are indirect.

None of the above.

Answer 1

(a).

Script, Inc. Territory and Company Income Statements For the Month of September
	Florida	Alabama	Company Total
Sales;
Pens	$18000	$7000	$25000
Pencils	$6000	$24000	$30000
Total sales	$24000	$31000	$55000
Less: Variable costs;
Pens	$7200	$2800	$10000
Pencils	$2400	$9600	$12000
Total variable costs	$9600	$12400	$22000
Contribution margin	$14400	$18600	$33000
Less: Direct fixed expenses	$2000	$3000	$5000
Territory margin	$12400	$15600	$28000
Less: Common fixed expenses;
Pens			$7000
Pencils			$6000
Home office			$1000
Total common fixed expenses			$14000
Net income			$14000

Working Note;

1. Variable costs are classified as follow;

For Florida:

Pens ($10000 * 18000 / 25000) = $7200

Pencils ($12000 * 6000 / 30000) = $2400

For Alabama:

Pens ($10000 * 7000 / 25000) = $2800

Pencils ($12000 * 24000 / 30000) = $9600

(b).

Answer is option (Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product).

Explanation;

It is true that some costs may be directly traceable to one segment but may not be traceable to other segment that is why direct expenses of one type of segment report not necessarily the direct expenses of another type of segment report.