Company A, Inc., has recently purchased a competing manufacturer that it intends

Question

Company A, Inc., has recently purchased a competing manufacturer that it intends to operate as one of its subsidiaries. The newly acquired facility has three products that it offers for sale—cocoa powder, chocolate chips and sugar in the raw. Each product sells for $10 per package. Materials, labor, and other variable production costs are $4.90 per bag of cocoa powder, $6.10 per bag of chocolate chips, and $3.10 per bag of sugar in the raw. Sales commissions are 10% of sales for any product. All other costs are fixed.

The manufacturer’s income statement for the most recent month is given below:

The following additional information is available about the company:

a.   The same equipment is used to produce and package all three products. In the above income statement, equipment depreciation has been allocated on the basis of sales dollars. An analysis of equipment usage indicates that it is used 40% of the time to make cocoa powder, 50% of the time to make chocolate chips, and 10% of the time to make sugar in the raw.

b. All three products are stored in the same warehouse. In the above income statement, the warehouse rent has been allocated on the basis of sales dollars. The warehouse contains 46,800 square feet of space, of which 8,000 square feet are used for cocoa powder, 14,000 square feet are used for chocolate chips, and 24,800 square feet are used for sugar in the raw. The warehouse space costs the company $0.50 per square foot per month to rent.

c.   The general administration costs relate to the administration of the company as a whole. In the above income statement, these costs have been divided equally among the three product lines.

d. All other costs are traceable to the product lines.

Company A, Inc’s management is anxious to improve the manufacturer’s 4.5% margin on sales.

Required:

Prepare a new contribution format segmented income statement for the month. Adjust the allocation of equipment depreciation and warehouse rent as indicated by the additional information provided.

Explanation / Answer

Contribution Format Segmented Income Statement Segments Cocoa Powder Chocolate Chips Sugar in the Raw Total Company Sales in Units 39000 49000 29000 SP per unit $10 $10 $10 Total Sales (A) $390,000 $490,000 $290,000 $1,170,000 Variable Costs Material & Labour $191,100 $298,900 $89,900 $579,900 Sales Commission (10% of Sales) $39,000 $49,000 $29,000 $117,000 Total Variable Costs (B) $230,100 $347,900 $118,900 $696,900 Contribution (C = A - B) $159,900 $142,100 $171,100 $473,100 Traceble Fixed Costs Advertising $73,000 $50,000 $33,050 $156,050 Salaries $43,300 $10,200 $45,000 $98,500 Equipment Depreciation (4:5:1) 23400 29250 5850 $58,500 Warehouse Rent 4000 7000 12400 $23,400 Total Traceble Fixed Costs (D) $143,700 $96,450 $96,300 $336,450 Divisional Segmented Profit (E=C-D) $16,200 $45,650 $74,800 $136,650 Common Fixed Expenses not Traceable to individual Division General Administration $84,000 Net Operating Income $52,650 Warehouse Rent Cocoa Powder = 8000 Sq feet X 0.50 = $4000 Chocolate Chips = 14000 Sq feet X 0.50 = $7000 Sugar in the Raw = 24800 Sq feet X 0.50 = $12400

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