Segmented Net Income. Valdez Company has two divisionsAppliances and Tools. The following segmented financial information is for the most recent fiscal year ended December 31.

	Appliances Division	Tools Division
Sales	$3,000,000	$1,000,000
Cost of goods sold	1,600,000	430,000
Allocated overhead	375,000	125,000
Selling and administrative expenses	250,000	200,000

Assume the tax rate is 30 percent.

Required:

Prepare a segmented income statement using the format presented in Figure 11.3. 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?

Figure 11.3 Segmented Income Statements (Game Products, Inc.)

Game Products, Inc. Segmented Income Statements for the Current Fiscal Year Ended December 31 (dollar amounts are in thousands) Sporting Goods Division Board Games Division Computer Games Division Sales Cost of goods sold Gross marain Allocated overhead (from corporate) Selling and administrative expenses Operating income Income tax expense (30% rate) Net income Profit margin ratio 20,000 6,000 $ 14,000 1,205 9,500 $ 3,295 989 $ 2,306 11 .53% $34,000 11,000 $23,000 2,048 16,000 $ 4,952 1,486 $ 3,466 10.19% $ 29,000 10,000 $ 19,000 1,747 15,000 $ 2,253 676 5.44%