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Restructing a Segmented Income Statement

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Marioco, in Brazil, is organized into two divisions. The company's contribution format segmented income statement (in terms of the Brazilian currency Real) for last month is given below:
Total company Cloth Leather
Sales R3, 500,000 R2, 000,000 R1,500,000
Variable expenses 1,721,000 960,000 761,000
Contribution margin 1,779,000 1,040,000 739,000

Traceable fixed expenses:
Advertising 612,000 300,000 312,000
Administration 427,000 210,000 217,000
Depreciation 229,000 115,000 114,000

Total traceable fixed expenses 1,268,000 625,000 643,000
Divisional segment margin 511,000 R 415,000 R 96,000
Common fixed expenses 390,000
Net operating income R 121,000

Top management can't understand why the Leather Division has such low segment margin when its sales are only 25% less than sales in the Cloth Division. AS one step in isolating the problem, management has directed that the Lather Division be further segmented into product lines. The following information is available on the product lines in the Leather Division:

Leather Division Product Lines
Garments Shoes Handbags
Sales R500, 000 R700, 000 R300, 000
Traceable fixed expenses:
Advertising R80, 000 R112, 000 R120, 000
Administration R30, 000 R 35,000 R 42,000
Deprecation R25, 000 R 56,000 R 33,000
Variable expenses as a percentage
of sales 65% 40% 52%

Analysis shows that R 110,000 of the Leather Division's administration expenses is common to the product lines.

1. Prepare a contribution format segmented income statement for the Leather Division with segments defined as product lines.
2. Management is surprised by the handbag product line's poor showing and would like to have the product line segmented by market. The following information is available about the markets in which the handbag line is sold:

Handbag Market
Domestic Foreign
Sales R200, 000 R100, 000
Traceable fixed expenses:
Advertising R40, 000 R80, 000
Variable expenses as a percentage
of sales 43% 70%
All of the handbag product line's administration expenses and depreciation are common to the markets in which the product is sold. Prepare a contribution format segmented income statement for the handbag product line with segments defined as markets.

3. Refer to the statement prepared in (1) above. The sales manager wants to run a special promotional campaign on one of the products over the next month. A marketing study indicates that such a campaign would increase sales of the garment product line by R200, 000 or sales of the shoes product line by R145, 000. The campaign would cost R30, 000. Show computations to determine which product line should be chosen.

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Solution Summary

The solution examines restructuring a segmented income statement for the Leather Division with segments defined as product lines.

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Restructing a Segmented Income Statement

Vabant PV of the Netherlands is a wholesale distributor of wine, in which it's sold throughout the European Community. The company profits are declining, which is causing a concern. To help understand the condition of the company, the managing director of the company has requested that the monthly income statement be segmented by sales territory. The accounting department has prepared the following statement for March, the most recent month, (The Dutch currency is euro which is designated by E=.)

Sales Territory
Southern Middle Northern
Europe Europe Europe
Sales E=300,000 E=800,000 E=700,000
Territorial expenses (traceable):
Cost of goods sold 90,000 240,000 315,000
Salaries 54,000 56,000 112,000
Insurance 9,000 16,000 14,000
Advertising 105,000 240,000 245,000
Depreciation 21,000 32,000 28,000
Shipping 15,000 32,000 42,000
Total territorial expenses 297,000 616,000 756,000
Territorial income (loss) before
Corporate expenses 3,000 184,000 (56,000)
Corporate expenses:
Advertising (general) 15,000 40,000 35,000
General administrative 20,000 20,000 20,000
Total corporate expenses 35,000 60,000 55,000
.Net operating income (loss) E=(32,000) E=124,000 E=(111,000)

Cost of goods sold and shipping expenses are both variable; other costs are all fixed. Vabant PV purchases of wine at auctions and cooperatives, and distributes them in the three territories listed above; each of the three sales territories has its own manager and sales staff. The wines vary widely in profitability; some have high and low margins

1. List any disadvantages or weaknesses, from the statement formatted above.
2. Explain the basis that is apparently being used to allocate the corporate expenses to the territories, are the allocations agreeable, and why?
3. Prepare a segmented contribution format income statement for May. Show a Total column as well as data for each territory. Include percentages for all columns and carry to one decimal place.
4. Analyze the statement prepared in (3)-what points can help improve the company's performance that can be presented to management?

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