The most recent financial statement for Reston Company is given below: RESTON CO
ID: 2579975 • Letter: T
Question
The most recent financial statement for Reston Company is given below:
RESTON COMPANY Income Statement
For the Month ended March 31, 2015
Sales…………………………….......... $900,000 100.0%
Less variable expenses……………… 408,000 45.3
Contribution margin……………………. $492,000 54.7
Less fixed expenses…………………….. 465,000 51.7
Net operating income…………………. $ 27,000 3.0%
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:
a. The Company is divided into two territories—Central and Eastern with the following related sales and cost information:
Central Territory Eastern Territory
Sales……………….. $400,000 $500,000
Variable expenses 208,000 200,000
Traceable fixed expenses 160,000 130,000
The rest of the fixed expenses are common to the two territories.
b. The company sells two products—Shoes and Handbags with sales of $100,000 and $300,000 respectively, in the Central Division during May. Variable expenses are 43% of the selling price of Shoes and 55% for Handbags. Cost records show that $60,000 of the Central Territory’s fixed expenses are traceable to Shoes and $54,000 to Handbags, with the remainder common to the two products.
Required:
1. Prepare segmented income statements, first showing the total company broken down between sales territories and then showing the Central Territory broken down by product line. Show both Amount and Percent columns for the company in total and for each segment. Round percentage computations to two decimal places.
2. Look at the statement you have prepared showing the total company segmented by sales territory. What points revealed by this statement should be brought to the attention of management?
3. Look at the statement that you have prepared showing the Central Territory segmented by product lines. What decisions should the company make regarding its Shoe and Handbag product lines?
Explanation / Answer
1.
2. From the segmented income statement by sales territory, the management should be made aware of the higher variable costs and thus lower contribution margins for the central territory. Also the higher traceable fixed expenses for central territory should be brought to the attention of the management since the same results in a very low segment operating margin of 8% against that of the eastern territory of 34%.
3. Looking at the segmented income statement by product lines, it is observed that the shoes product line has a negative segment operating margin of 3%. Reston Company thus needs to decide whether it would like to continue with its shoes product line which is generating a negative margin or it would like to discontinue with the shoes and expand the handbags line.
Reston Company Segmented Income Statement (Sales territory) For the Month Ended March 31, 2015 Central Territory Eastern Territory Totals Amount $ Percent Amount $ Percent Amount $ Percent Sales 400000 100.00% 500000 100.00% 900000 100.00% Variable expenses 208000 52.00% 200000 40.00% 408000 45.33% Contribution margin 192000 48.00% 300000 60.00% 492000 54.67% Traceable fixed expenses 160000 40.00% 130000 26.00% 290000 32.22% Segment operating margins 32000 8.00% 170000 34.00% 202000 22.44% Common fixed expenses 175000 19.44% Net operating income (loss) 27000 3.00% Reston Company Segmented Income Statement (Product line) For the Month Ended March 31, 2015 Shoes Handbags Central Territory Totals Amount $ Percent Amount $ Percent Amount $ Percent Sales 100000 100.00% 300000 100.00% 400000 100.00% Variable expenses 43000 43.00% 165000 55.00% 208000 52.00% Contribution margin 57000 57.00% 135000 45.00% 192000 48.00% Traceable fixed expenses 60000 60.00% 54000 18.00% 114000 28.50% Segment operating margins -3000 -3.00% 81000 27.00% 78000 19.50% Common fixed expenses 46000 11.50% Net operating income (loss) 32000 8.00%Related Questions
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