Question

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		300,000
Contribution margin		600,000
Fixed expenses		495,000
Net operating income	$	105,000

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 $200,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $156,000 and $145,000 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 $190,000 and $210,000, respectively, in the Northern territory during June. Variable expenses are 29% of the selling price for Paks and 69% for Tibs. Cost records show that $93,100 of the Northern Territory’s fixed expenses are traceable to Paks and $46,200 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.

Answer 1

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

			Sales Territory
	Total Company		Northern		Southern
	Amount	%	Amount	%	Amount	%
Sales	$900000	100	$400000	100	$500000	100
Variable expenses	$300000	33.3	$200000	50	$100000	20
Contribution margin	$600000	66.7	$200000	50	$400000	80
Traceable fixed expenses	$301000	33.4	$156000	39	$145000	29
Territorial segment margin	$299000	33.2	$44000	11	$255000	51
Common fixed expenses	$194000	21.6
Net operating income	$105000	11.7

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

			Product Line
	Total Company		Northern		Southern
	Amount	%	Amount	%	Amount	%
Sales	$400000	100	$190000	100	$210000	100
Variable expenses	$200000	50	$55100	29	$144900	69
Contribution margin	$200000	50	$134900	71	$65100	31
Traceable fixed expenses	$139300	34.8	$93100	49	$46200	22
Product Line segment margin	$60700	15.2	$41800	22	$18900	9
Common fixed expenses	$16700	4.2
Sales territory segment margin	$44000	11