equired Prepare a contribution format income statement segme

equired Prepare a contribution format income statement segmented by geographic market. as requested by the president. The company\'s sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising is increased by S25000, would you recom- mend the increased advertising? Show computations to support your answer FXERCISE 11-3 Working with a Segmented Income Statement ILO1 Middleton Associates is a consulting firm that specializes in information systems for con- struction and landscaping companies. The firm has two offices-one in Toronto and one in sifies the direct costs of consulting jobs as variable costs. A segmented contribution format income statement for the company\'s most recent year is given below Office Total Company $750.000 1000% s0000 100% sanoo Toronto Vancouver Sales ariable expenses Contribution margin.. 405000 540 345000 460 45000 30 60 05000 70 240000 4 8000 52 . 168000 224 90000 5 Office segment margin Common fixed expenses 17100 236 52100 18%-25% not traceable to offices.120000 60 57000 76% Operating income 1 By how per year? Assume no change in cost behaviour patterns. er to the original data. Assume that sales in Toronto increase by $50000 next year and much would the companys operating income increase if Vancouver increased its sales by $75.000 sales in Vancouver remain unchanged. Assume no change in fixed costs Show both amounts and percentages. that hepare a new segmented income statement for the company using the above format fr the income statement you have prepared that the CM ratio remained unchanged at 70% (the segment argin ratio has changed. How do you explain the change in the segment margin ratio? with a Segmented Income Statement ILO1 same as in the above data) but that the the data in Exercise 11-3. Assume t rcise 11-3. Assume that Vancouver\'s sales by major market are as

Solution

1.

If the sales of Vancouver segment increases by $75,000, the company\'s operating income will increase by $30,000 (40% of $75,000).

this is because, the contribution margin for Vanocuver is 40% , the operting income income will increase by 40% of the increase in sales , as there is no increase in fixed costs.

2.

a.

b.

Segmwent margin ratio is the marigin of the segment after considering all the costs (both fixed and variable). The contribution margin is the difference between the sales price and variable costs.

Variable costs are the costs which change with the level of activitiy or(sales). Therefore variable costs will change in the same proportion as the sales. Therefore since the variable costs are 30% of sales , Therefore there will be an increase of $15,000 (30% of $50,000) when the sales go up by $50,000. Consequently the contribution margin will increase by $35,000 (70% of $50,000)

Fixed costs are the costs which will remain the same (within a range of activity) irrespective of the activity level. therefore even though the variable costs go up by $15,000, the segment fixed costs remain constant at $78,000, which results in higher office segment margin , than the current situation.

In total there will be an increase of $35,000 increase in the office segment margin, which will result in a higher office segemner margin percntage of 31%.

	Total company	Office
Toronto	Vancouver
Sales	800000	100%	200000	100%	600000	100%
Variable costs	420000	53%	60000	30%	360000	60%
Contribution margin	380000	48%	140000	70%	240000	40%
Traceable fixed expenses	168000	21%	78000	39%	90000	15%
Office Segment Margin	212000	26.5%	62000	31%	150000	25%
Common Fixed expenses
not traceable to offices	120000	15%
Operating Income	92000	11.5%