Problem 22.5A Butterfield, Inc.

Part b-d needed

PROBLEM 22.5A
The following are responsibility income statements for Butterfield, Inc., for the month of March.
				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
Productresponsibility margin				$ 78,000		26%		$ 22,000		22%		$ 56,000		28%
Common fixed costs				21,000		7
Responsibility margin for division				$ 57,000		19%
Instructions:
a.
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.
b.
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.
c.
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.?
d.
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).
e.
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.