Question

Vulcan Company’s contribution format income statement for June is as follows: Vulcan Company Income Statement For the Month Ended June 30 Sales $ 800,000 Variable expenses 300,000 Contribution margin 500,000 Fixed expenses 450,000 Net operating income $ 50,000 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: The company is divided into two sales territories—Northern and Southern. The Northern Territory recorded $300,000 in sales and $150,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $123,000 and $100,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories. The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $105,000 and $195,000, respectively, in the Northern territory during June. Variable expenses are 24% of the selling price for Paks and 64% for Tibs. Cost records show that $52,500 of the Northern Territory’s fixed expenses are traceable to Paks and $40,950 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

Answer:

Vulcan Company Income Statement For the Month Ended June 30:

1-a) Income Statement between sales territories:

i) Northern territory income statement (see attachment)

Sales = $300,000

Variable cost = $150,000

Contribution = $150,000

Fixed cost = $236,500

Net Income = $(86,500)

ii) Southern Territory income statement (see attachment):

Sales = $500,000

Variable cost = $150,000

Contribution = $350,000

Fixed Cost = $213,500

Net Income = $136,500

1-B) Contribution format segmented income statements for the North:

Paks (see attachment):

Sales = $105,000

Variable cost = $25,200

Contribution = $79,800

Fixed cost = $124,025

Net Income = ($44,225)

Tibs (see attachment):

Sales = $195,000

Variable cost = $124,800

Contribution = $70,200

Fixed cost = $112,475

Net Income = ($42,275)

Explanation:

a) Fixed cost is determined as follows:

Northern Territory:

Traceable fixed cost = $123,000

Common fixed cost = $113,500 (450,000 - 123,000 - 100,000) /2

Total = $236,500 ($123,000 + $113,500)

Southern Territory:

Traceable fixed = $100,000

Common fixed cost = $113,500 (as above_

Total = $213,500 ($100,000 + $113,500)

b) Variable cost for Northern Paks and Tibs:

Paks = 24% of $105,000 = $25,200

Tibs = 64% of $195,000 = $124,800

c) Fixed cost for Northern Paks and Tibs:

Paks:

Traceable = $52,500

Common = $71,525 ($235,500 - 52,500 - 40,950) / 2

Total = $124,025

Tibs:

Traceable = $40,950

Common = $71,525 ($235,500 - 52,500 - 40,950) / 2

Total = $112,475

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