Vulcan Company Income Statement For the Month Ended June 30 Sales . . . . . . .
ID: 2630461 • Letter: V
Question
Vulcan Company
Income Statement
For the Month Ended June 30
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . 336,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . 414,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . 378,000
Net operating income . . . . . . . . . . . . . . . . . . . . $ 36,000
Management is disappointed with the companys performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:
The company is the exclusive distributor for two productsPaks and Tibs. Sales of Paks and Tibs totaled $50,000 and $250,000, respectively, in the Northern territory during June. Variable expenses are 22% of the selling price for Paks and 58% for Tibs. Cost records show that
$30,000 of the Northern territorys fixed expenses are traceable to Paks and $40,000 to Tibs, with the remainder common to the two products.
Required:
1. Prepare contribution format segmented income statements first showing the total company
broken down between sales territories and then showing the Northern territory broken down
by product line. 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.
2. Look at the statement you have prepared showing the total company segmented by sales territory.
What insights revealed by this statement should be brought to the attention of management?
3. Look at the statement you have prepared showing the Northern territory segmented by product
lines. What insights revealed by this statement should be brought to the attention of management?
Explanation / Answer
1. (a) Contribution format segmented income statement showing the total company broken down between Northern and Southern Territory (Table 1):
Note 1: Calculation of Fixed costs between Northern and Southern territories:
Total Fixed costs of the company = $ 378,000
Less: fixed costs attributable only to northern territory = $ 120,000
Less: fixed costs attributable only to southern territory = $ 108,000
Balance Fixed costs = $ (378000-120000-108000) =$ 150,000
It is given that rest of the fixed expenses are common to the two territories.
Therefore, the balance fixed costs will be apportioned equally between the 2 territories.
Therefore, total fixed costs attributable to the northern territory = $ (120000 + 150000/2) = $ 195,000
Total fixed costs attributable to the southern territory = $ (108000 + 150000/2) = $ 183,000
1. (b) Contribution format segmented income statement showing the Northern territory broken down
by product line (Table-2):
Note 2:
Calculation of Fixed costs between Paks and Tibs for the Northern territory:
Total Fixed costs of the Northern territory = $ 195,000
Less: fixed costs attributable only to Paks = $ 30,000
Less: fixed costs attributable only to Tibs = $ 40,000
Balance Fixed costs = $ (195000-30000-40000) =$ 125,000
It is given that rest of the fixed expenses are common to the two products.
Therefore, the balance fixed costs will be apportioned equally between the 2 products.
Therefore, total fixed costs attributable to Paks = $ (30000 + 125000/2) = $ 92,500
Total fixed costs attributable to Tibs = $ (40000 + 125000/2) = $ 102,500
1. (c) Segmented income statements showing each item of the company and each segmenton as a percent of sales (Table 3):
2. If we look at Table 1, we find that the overall profitability of the company is adversely affected by the performance of the Northern territory.Since, the Northern territory yield negative operating income, i.e., losses, the companies operations in the Northern territory must be stopped to protect the Company's wealth.
3. It is to be noted that the Northern territory is not profitable. However, if the Company looks into the reasons behind this non-profitability, it may be able to make some decisions. If we look at Table 2, we find that the overall profitability of the Northern territory is adversely affected by the performance of the product Paks i.e., product Paks incurrs losses. However, the product Tibs generates profits.Therefore, the companies should stop producing product Paks in the Northern territory and produce only product Tibs.
Particulars Workings Northern Southern Total a. Sales 300000 (750000-300000) 450000 750000 b. Variable Costs 156000 (336000-156000) 180000 336000 c. Contribution Margin (a-b) 144000 270000 414000 d. Fixed Costs (Note-1) 195000 183000 378000 e. Net Operating Income (c-d) -51000 87000 36000
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