Shannon Company segments its income statement into its North and South Divisions

Question

Shannon Company segments its income statement into its North and South Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $900,000, 30%, and $18,000, respectively. The North Division’s contribution margin and contribution margin ratio are $102,000 and 34%, respectively. The South Division’s segment margin is $120,000. The company has $180,000 of common fixed expenses that cannot be traced to either division.

Required:

Prepare an income statement for Shannon Company that uses the contribution format and is segmented by divisions. In addition, for the company as a whole and for each segment, show each item on the segmented income statements as a percent of sales. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))

Explanation / Answer

The income statement for both divisions and the company as a whole is shown as follows:-   

Income Statement for Shannon Company (Amounts in $)

Working Notes:-

1) As the sales, contribution margin ratio and net operating income for the total company is given in the question the income statement for the total company can be prepared first. After that north division contribution margin ratio and contribution margin are also given in the question, from this sales and variable cost for north division is calculated. The balances of south division is the difference between the balance for total company and balance for North division.

2) Percentage are based on sale and sales are assumed to be equal to 100%.

Total Company North Division South Division Amount % Amount % Amount % Sales 900,000 100% 300,000 100% 600,000 100% Less: Variable Expense 630,000 70% 198,000 66% 432,000 72% Contribution Margin 270,000 30% 102,000 34% 168,000 28% Less: Traceable Fixed Expenses (72,000) 8% (24,000) 8% (48,000) 8% Territorial Segment Margin 198,000 22% 78,000 26% 120,000 20% Less: Common Fixed Expenses (180,000) 20% Net Operating Income (given) 18,000 2%

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