Segmented Net Income. Sorrento Company has three divisions$$Northwest$,$ South, and East. The following segmented financial information is for the most recent fiscal year ended December $31.$ Segmented Net Income

a$.$ Segmented income statements are shown below.

Rocky, Inc.

Segmented Income Statements

For the Current Fiscal Year Ended December $31$ Segmented Net Income. Sorrento Company has three divisions$-$Northwest, South, and East.

The following segmented financial information is for the most recent fiscal year ended December

Assume the tax rate is $35$ percent.

Required:

a$.$ Prepare a segmented income statement using the format presented in Table $11\mathrm{.}1.$ Include the

profit margin ratio for each division at the bottom of the segmented income statement.

b$.$ Using net income as the measure, which division is most profitable? Explain why this

conclusion might be misleading.

c$.$ What does the profit margin ratio tell us about each division? Why do organizations often use

profit margin ratio to evaluate division performance rather than simply using net income?

Northwest Division South Division East Division

Sales $ $22,000,000$ $ $8,000,000$ $ $18,000,000$

Cost of goods sold $10,000,0002,000,0007,000,000$

Allocated overhead $4,125,0001,500,0003,375,000$

Selling and administrative expenses $5,000,0003,200,0005,000,000$

Assume the tax rate is $35$ percent.

Required:

Prepare a segmented income statement using the format presented in Table $11\mathrm{.}1.$ Include the profit margin ratio for each division at the bottom of the segmented income statement.

Using net income as the measure, which division is most profitable? Explain why this conclusion might be misleading.

What does the profit margin ratio tell us about each division? Why do organizations often use profit margin ratio to evaluate division performance rather than simply using net income?