Segment Reporting & Profitability Analysis Case Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The company's major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacic Rim's board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement. Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings. Product Lines Furniture Sports Appliances Total Production and sales in units 160,000 180,000 160,000 500,000 Average selling price per unit $8.00 $20.00 $15.00 Average variable manufacturing cost per unit 4.00 9.50 8.25 Average variable selling expense per unit 2.00 2.50 2.25 Fixed manufacturing overhead, excluding depreciation $500,000 Depreciation of plant and equipment 400,000 Administrative and selling expense 1,160,000 1. The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs. 2. Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced. 3. There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation. Manufacturing Staff Sales Staff Furniture $120,000 United States 39 60,000 Sports 140,000 Canada 100,000 Appliances 80,000 Asia 250,000 The division managers were able to provide reliable sales percentages for their product lines by geographical area. Percentage of Unit Sales United States Canada Asia Furniture 40% 1 0% 50% Sports 40% 40% 20% Appliances 20% 20% 60% Murphy prepared the following product-line income statement based on the data presented above. PACIFIC RIM INDUSTRIES Segmented Income Statement by Product Lines For the Fiscal Year Ended April 30, 202x Product Lines Furniture Sports Appliances Unallocated Total Sales in units 160 000 180 000 160 000 Sales $1,280,000 $3,600,000 $2,400,000 $7,280,000 Var. manf. & selling costs 960 000 2 160 000 1 680 000 4 800 000 Contribution margin 320 000 1 440 000 720 000 2 480 000 Fixed costs: Fixed manf. o/h $100,000 $225,000 $175,000 $500,000 Depreciation 128,000 144,000 128,000 400,000 Admin & selling exp. 120,000 140,000 80,000 820,000 1,160,000 Total fixed $348,000 $509,000 $383,000 $820,000 $2,060,000 Operating income (loss) $(28,000) $931,000 $337,000 $820,000) $420,000 Required: 1. Prepare a segmented income statement for Pacic Rim Industries based on the company's geographical areas. The statement should show the operating income for each segment. 2. As a result of the information disclosed by both segmented income statements (by product line and by geographic area), recommend areas where Pacific Rim Industries should focus its attention in order to improve corporate profitability. Geographic Areas United States Canada Asia Unallocated Total E Sales in units" Formula 4 Furniture Sports 6 Appliances Total unit sales 9 Revenue 10 Furniture 11 Sports Ible e e 12 Appliances 13 Total revenue 14 15 Variable costs" 16 Furniture 17 Sports 18 Appliances le ble e e 19 Total variable costs 20 Contribution margin 21 22 Fixed costs 23 24 Manufacturing overhead 25 Depreciation 26 Administrative and selling expenses 27 Total fixed costs 28 29 Operating income (loss) 50