The most recent monthly contribution format income statement for Reston Company is given below
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Reston Company
Income Statement
For the Month Ended May 31
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Sales
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$900,000
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100%
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Variable Expenses
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408,000
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45.3
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Contribution margin
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492,000
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54.7
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Fixed expenses
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465,000
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51.7
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Net operating income
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$27,000
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3.0%
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Management is disappointed with the company's performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:
a. The company is divided into two sales territories-- Central and Eastern. The Central Territory recorded $400,000 in sales and $208,000 in variable expenses during May. The remaining sales and variable expenses were recorded in the Eastern Territory. Fixed expenses of $160,000 and $130,000 are traceable in the Central and Eastern Territories respectively. The rest of the fixed expenses are common to the two territories.
b. The company is the exclusive distributor for two products -- Awls and Pows. Sales of awls and Pows totaled $100,000 and $300,000 respectively, in the Central Territory during May. Variable expenses are 25% of the selling price for Awls and 61% for Pows. Cost records show that $60,000 of the Central Territory's fixed expenses are traceable to awls and $54,000 to Pows with the remainder common to the two products.
Required:
1. Prepare contribution format segmented income statements, first showing the total company broken down between sales territories and then showing the Central Territory broken down by product line. In addition, for the company as a whole and for each segment, show each item on the segmented income statement as a percent of sales.
2. Look at the statement you have prepared showing the total company segmented by sales territory. What points revealed by this statement should be brought to management's attention?
3. Look at the statement you have prepared showing the Central Territory segmented by product lines. What points revealed by this statement should be brought to management's attention?