Question
Tennessee Company is geographically segmented into two divisions East and West. The companys income statement for the last month is presented below: Total Company Division
Tennessee Company is geographically segmented into two divisions East and West. The companys income statement for the last month is presented below:
| Total Company |
|
| Division |
| |
% of sales | West | % sales | East | % sales | ||
Sales | $8,500,000 |
| $4,675,000 |
| $3,825,000 |
|
Variable expenses | 3,395,750 |
| 1,636,250 |
| 1,759,500 |
|
Contribution margin | $5,104,250 | 60% | $3,038,750 | 65% | $2,065,500 | 54% |
Total Fixed expenses | 3,825,000 |
45% | 1,912,500 |
41% | 1,912,500 |
50% |
Net income | $1,279,250 | 15% | $1,126,250 | 24% | $153,000 | 4% |
Management is concerned with the reported results, especially the East Divisions net income results in relation to the net income results of the West Division. They have asked you to examine the East Division in relation to West Division and further to examine the East Division to determine if any of the three product lines are causing the low level of profitability in that division.
You have been provided the following additional information:
Of the total fixed expenses reported above, management has determined that 30% are traceable the East Division, 55% are traceable to the West Division. The remaining fixed expenses are common to both divisions.
The East provided the following respecting the three product lines:
| Product Line | ||
|
Cola | Fruit Drinks | Flavoured Water |
Sales | $1,147,500 | $1,721,250 | $956,250 |
Traceable fixed expenses |
|
|
|
Administration | 103,275 | 103,275 | 51,638 |
Advertising | 255,606 | 139,421 | 69,711 |
Depreciation | 123,930 | 154,913 | 30,983 |
Variable Expenses | 351,900 | 615,825 | 791,775 |
The remaining fixed costs for the East Division are common to all product lines.
Required:
- Prepare segmented income statements for:
- total company broken down between the two divisions,
- the East Division broken down by product line.
Show both amount and percent columns for all information.
- What observations and recommendations would you make to management based on your analysis? Be sure to integrate your analysis.
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