PROBLEM 22.5A Analysis of Responsibility Income Statements LO22-3, LO22-4, LO22-5 The following are responsibility income statements for Butterfield, Inc., for the month of March.Page 992 Table Summary: This table is divided into two sections. Row 1 is a header labeled, Investment Centers, and spans columns 2 through 7. Row 2 contains three headers. The first header spans columns 2 and 3, the second spans columns 4 and 5, and the the third spans columns 6 and 7. These headers are labeled, Butterfield, Inc., Division 1, and Division 2 respectively. Row 3 contains subheaders that divide each of those headers into separate columns labeled Dollars and Percentage. Rows 9 and 10 contain no data in columns 4 through 7. Row 11 contains a header labeled, Profit Centers, that begins section 2 of the table. The structure of the second section is identical to the structure of the first section. Investment Centers Butterfield, Inc. Division 1 Division 2 Dollars % Dollars % Dollars % Sales $450,000 100% $300,000 100% $150,000 100% Variable costs 225,000 50 180,000 60 45,000 30 Contribution margin $225,000 50% $120,000 40% $105,000 70% Fixed costs traceable to divisions 135,000 30 63,000 21 72,000 48 Division responsibility margin $90,000 20% $57,000 19% $33,000 22% Common fixed costs 45,000 10 Income from operations $45,000 10% Profit Centers Division 1 Product A Product B Dollars % Dollars % Dollars % Sales $300,000 100% $100,000 100% $200,000 100% Variable costs 180,000 60 52,000 52 128,000 64 Contribution margin $120,000 40% $ 48,000 48% $72,000 36% Fixed costs traceable to products 42,000 14 26,000 26 16,000 8 Product responsibility margin $78,000 26% $ 22,000 22% $56,000 28% Common fixed costs 21,000 7 Responsibility margin for division $57,000 19% Instructions The company plans to initiate an advertising campaign for one of the two products in Division 1. The campaign would cost $10,000 per month and is expected to increase the sales of whichever product is advertised by $30,000 per month.

Compute the expected increase in the responsibility margin of Division 1 assuming that (1) product A is advertised and (2) product B is advertised.

Assume that the sales of both products by Division 1 are equal to total manufacturing capacity. To increase sales of either product, the company must increase manufacturing facilities, which means an increase in traceable fixed costs in approximate proportion to the expected increase in sales. In this case, which product line would you recommend expanding? Explain.

The income statement for Division 1 includes $21,000 in common fixed costs. What happens to these fixed costs in the income statement for Butterfield, Inc.?

Assume that in April the monthly sales in Division 2 increase to $200,000. Compute the expected effect of this change on the operating income of the company (assume no other changes in revenue or cost behavior).

Prepare an income statement for Butterfield, Inc., by division, under the assumption stated in part d. Organize this income statement in the format illustrated, including columns for percentages.