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Page SOS PROBLEM 11-17 Segment Reporting and Decision Making L01 Creaston Limited's most recent monthly contribution format income statement is given below: CREASTON LIMITED Income Statement For the Month Ended May 31 $900,000 408.000 Sales Variable expenses Contribution margin Fixed expenses Operating income 492.000 465.000 $ 27,000 100.0% 45.3 54.7 51.7 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 sales territories-Central and Eastern Central Territory recorded $400,000 in sales and S208.000 in variable expenses during May. The remaining sales and variable expenses were recorded in Eastern Territory, Fixed expenses of $160,000 and $130.000 are traceable to Central and Eastern Territories, respectively. The rest of the fixed expenses are common to the two territories b. The company is the exclusive distributor for two products-Kiks and Dows Sales of Kiks and Dows totalled $100,000 and $300,000, respectively, in Central Territory during May. Variable expenses are 25% of the selling price for Kiks and 61% for Dows. Cost records show that $60,000 of Central Territory's fixed expenses are traceable to Kiks and $54.000 to Dows, 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 Central Territory broken down by product line. Show both Amount and Percentage columns for the company in total and for each segment. Round percentage computations to one decimal place 2. Look at the statement you have prepared showing the total company segmented by sales territory, Which points revealed by this statement should be brought to management's attention? 3. Look at the statement you have prepared showing Central Territory segmented by product lines. Which points revealed by this statement should be brought to management's attention? B D E 1 G H Sales Territory Central Eastern 1 Prob 11-17 2 Part 1 3 4 5 Sales 8 Variable expenses 7 CM 8 Traceable foxed expenses 9 Territorial segment margin 10 Common fixed expenses 11 Operating income 12 13 14 15 Sales 16 Variable expenses 17 CM 18 Traceable fixed expenses 19 Product line segment margin 20 Common fixed expenses 21 Sales territory segment margin 22 Total Company 900,000 100.0% 408,000 45.3% 492,000 54.796 0.0% 0.0% 0.09 27,000 3.09 Central Territory Product Line Kiks Dows Central Territory 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 From the solution manual: 2. Two points should be brought to the attention of management. First, compared to the Eastern territory, the Central territory has a low contribution margin ratio. Second, the Central territory has high traceable fixed expenses. Overall, compared to the Eastern territory, the Central territory is very weak. 3. Again, two points should be brought to the attention of management. First, the Central territory has a poor sales mix. Note that the territory sells very little of the Kiks product, which has a high contribution margin ratio. It is this poor sales mix that accounts for the low overall contribution margin ratio in the Central territory mentioned in part (2) above. Second, the traceable fixed expenses of the Kiks product seem very high in relation to sales. These high fixed expenses may simply mean that the Kiks product is highly leveraged; if so, then an increase in sales of this product line would greatly enhance profits in the Central territory and in the company as a whole
