Problem - Vulcan Company's contribution format income statement for June is given below:
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Vulcan Company
Income Statement
For the Month Ended June 30
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Sales
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$908,000
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Variable expenses
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406,784
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Contribution margin
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501,216
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Fixed expenses
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464,896
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Net operating income
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$36,320
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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-Northern and Southern. The Northern territory recorded $407,000 in sales and $203,730 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern territory. Fixed expenses of $151,000 and $121,000 are traceable to the Northern and Southern territories, respectively. The rest of the fixed expenses are common to the two territories.
b. The company is the exclusive distributor for two products-Paks and Tibs. Sales of Paks and Tibs totaled $104,000 and $303,000, respectively, in the Northern territory during June. Variable expenses are 24% of the selling price for Paks and 59% for Tibs. Cost records show that $55,000 of the Northern territory's fixed expenses are traceable to Paks and $51,000 to Tibs, with the remainder common to the two products.
Required -
1. Prepare contribution format segmented income statements.
2. Based on the above income statements, which of the following the statement(s) is true?
The high traceable fixed expenses of the Paks product may simply mean that Me Paks product is not highly leveraged.
- The Northern territory has high traceable fixed expenses.
- An increase in sales of Paks product line would not greatly enhance profits in the Northern territory.
- Compared to the Southern territory. the Northern territory has a low contribution margin ratio.
- The Northern territory has a poor sales mix.
- Overall, compared to the Southern territory. the NOftleM territory is very weak.