Question# 1 ( Segmented Reporting) ABC Company provides the following informatio
ID: 2405841 • Letter: Q
Question
Question# 1 (Segmented Reporting)
ABC Company provides the following information for their three divisions (A, B, & C)
A
B
C
Total
Sales
$ 500,000
$300,000
$900,000
$1,700,000
100%
Variable exp.
350,000
210,000
630,000
1,190,000
70%
Contribution margin
$ 150,000
$ 90,000
$270,000
$ 510,000
30%
Fixed exp.
100,000
75,000
75,000
250,000
Common costs *
29,500
17,500
53,000
100,000
Operating income
20,500
(2,500)
142,000
$ 160,000
* rounded to the nearest $ 00’s
ABC asked you to look into their Divisional performance. They provide the following information:
There are two products sold by each division – Tonkas and Wonkas. They each represent 50% of the total sales for their division. However, variable costs for Tonkas are 75% of sales and Wonkas are 65% of sales for each product line. Traceable fixed expenses for Tonkas and Wonkas are provided for each division. Common costs for each division are allocated based on divisional revenues rounded to the nearest $ 00’s.
Required:
Prepare a segment margin format income statement for each Division, and the total for all divisions. Comment on the performance of each Division.
Should the company drop any Division? Give quantitative reasons why/why not?
A
B
C
Total
Sales
$ 500,000
$300,000
$900,000
$1,700,000
100%
Variable exp.
350,000
210,000
630,000
1,190,000
70%
Contribution margin
$ 150,000
$ 90,000
$270,000
$ 510,000
30%
Fixed exp.
100,000
75,000
75,000
250,000
Common costs *
29,500
17,500
53,000
100,000
Operating income
20,500
(2,500)
142,000
$ 160,000
Explanation / Answer
All the three divisions are performing well and generating positive segment margins. Divisions A and C are in fact also generating net operating incomes. Division B though generating an operating loss, has a positive segment margin. Thus, all divisions are generating a positive segment margin thereby contributing towards the common fixed expenses.
The company should not drop any division since all three divisions are contributing towards the common fixed expenses. If any division is dropped, the operating income of the company will also drop to the extent of the segment margin generated by the division that is dropped. For example, if division B that has a operating loss is dropped, the company's operating income will reduce by $15000 which is the margin generated by division B towards covering the allocated common fixed expenses. Similarly, if divisions A or C are dropped, the operating income will reduce by $50000 and $195000 respectively.
ABC Company Segment Margin Format Income Statement Division Total A B C Company Sales 500000 300000 900000 1700000 Variable expenses 350000 210000 630000 1190000 Contribution margin 150000 90000 270000 510000 Traceable fixed expenses 100000 75000 75000 250000 Segment margin 50000 15000 195000 260000 Common fixed expenses 29500 17500 53000 100000 Operating income 20500 -2500 142000 160000Related Questions
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