{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# 202E12 - Exercise 12-11 Working with a Segmented Income...

This preview shows pages 1–3. Sign up to view the full content.

Exercise 12-11: Working with a Segmented Income Statement Given: Marple Associates is a consulting firm that specializes in information systems for construction and landscaping companies. The firm has two offices -- one in Houston and one in Dallas. The firm classifies 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 Houston Dallas Sales \$750,000 100.00% \$150,000 100.00% \$600,000 100.00% Variable expenses 405,000 54.00% 45,000 30.00% 360,000 60.00% Contribution margin \$345,000 46.00% \$105,000 70.00% \$240,000 40.00% Traceable fixed expenses 168,000 22.40% 78,000 52.00% 90,000 15.00% Market segment margin \$177,000 23.60% \$27,000 18.00% \$150,000 25.00% Common fixed expenses (not traceable to markets) 120,000 16.00% Net operating income \$57,000 7.60% Required: 1. By how much would the company's net operating income increase if Dallas increased its sales by \$75,000 per year? Assume no change in cost behavior patterns. Increase in Dallas sale \$75,000 Contribution margin ratio 40.00% Increase in Company's NOI \$30,000 2. Refer to the original data. Assume that sales in Houston increased by \$50,000 next year and that sales in Dallas remain unchanged. Assume no change in fixed costs. a. Prepare a new segmented income statement for the company using the above format. Show both amounts and percentages. Office Total Company Houston Dallas Sales \$800,000 100.00% \$200,000 100.00% \$600,000 100.00% Variable expenses 420,000 52.50% 60,000 30.00% 360,000 60.00% Contribution margin \$380,000 47.50% \$140,000 70.00% \$240,000 40.00% Traceable fixed expenses 168,000 21.00% 78,000 39.00% 90,000 15.00% Market segment margin \$212,000 26.50% \$62,000 31.00% \$150,000 25.00% Common fixed expenses (not traceable to markets) 120,000 15.00% Net operating income \$92,000 11.50% b. Observe from the income statement you have prepared that the CM ratio for Houston has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment margin ratio? The traceable fixed expenses are spread over a larger base as sales increase. Therefore, the segment margin ratio increase from 18% to 31%.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
The contribution margin ratio remains stable at 70% because there is no information to suggest that the selling price per unit or the variable cost per unit have changed. Exercise 12-12: Working with a Segmented Income Statement Given: Refer to the data in Exercise 12-11. Assume that Dallas' sales by major market Dallas: Market Clients Dallas Office Construction Landscaping Sales \$600,000 100.00% \$400,000 100.00% \$200,000 100.00% Variable expenses 360,000 60.00% 260,000 65.00% 100,000 50.00% Contribution margin \$240,000 40.00% \$140,000 35.00% \$100,000 50.00% Traceable fixed expenses 72,000 12.00% 20,000 5.00% 52,000 26.00% Market segment margin \$168,000 28.00% \$120,000 30.00% \$48,000 24.00% Common fixed expenses (not traceable to markets) 18,000 3.00% Net operating income \$150,000 25.00% The company would like to initiate an intensive advertising campaign in one of the studies indicate that such a campaign would increase sales in the construction Required: 1. In which of the markets would you recommend that the company focus its advertising campaign? The company should focus its campaign on Landscaping Clients.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}