Wires, Inc., sells telephone poles to utility and telephone companies across the United States. There are four regions that the sales department keeps track of: North, South, East, and West. Two types of poles are sold: 18" and 30" diameter poles. For many years, they have enjoyed growth in their top line and also their bottom line due to manufacturing changes and enhancements. Although they have enjoyed success and are currently profitable, they are nervous about their future, due to recent news that a competitor is bringing to market poles made out of steel. The CEO of the company, Robert Adams, took a look at the financial statements one day and stated, "It is great that we show a profit and that our profit margin is healthy but is there any way I can see how each region is doing?" You, as the new Cost Accounting manager, are assigned with the task of doing just that. In addition, he has asked some other questions.
In order that you can start preparing your answers, you are presented with the most recent contribution format income statement, which is as of 12/31/13:
Sales $5,000,000
Variable costs(VC) 2,955,000
CM 2,045,000
Fixed costs 1,500,000
Net operating income $ 545,000
So that you understand specifically what Mr. Adams is looking for, he emailed you the following:
1) The contribution statement is based upon sales of 1,000,000 units. How much contribution margin are we making on each pole sold?
2) If we could reduce our variable costs by 10%, what would be our new contribution margin per unit? By doing this, we would also need to increase our fixed costs by $100,000. Should we proceed with this change? Please show your figures.
3) If next year we wanted to achieve a net operating income figure of 20% more than what we show at 12/31/13, how many units would we have to sell to achieve that amount of profitability?
4) If we could reduce our variable costs by 10%, what would be our new contribution margin per unit? By doing this, we would also need to increase our fixed costs by $100,000. Should we proceed with this change? Please show your figures.
5) So that I can understand how each region is doing, please prepare a segmented income statement by region, using the 12/31/13 figures. Based upon recent information I acquired from sales, here is the breakdown by region:
% of sales VC, as a % of sales Traceable fixed
North 30% 62% $ 500,000
South 35% 60% 400,000
East 25% 58% 200,000
West 10% 50% 100,000
6) Based upon the 12/31/13 statement, can you calculate the degree of operating leverage? Also, if fixed stay the same and we anticipate that sales will increase by 15%, what will be our new net operating income figure?
7) Based upon your segmented income statement, I would like to see the breakdown of the North region. My understanding is that 75% of this region's sales are the 18" pole and that its contribution margin is 45%. Of the traceable fixed for this region, $350,000 can be traced to these two types of poles, with the 18" model assigned $210,000 of this amount and the balance to the 30" model. Please prepare a segmented income statement for the North region.