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Restructing a Segmented Income Statement

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:
Divisions
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.

Required:
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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