Question: Please answer in the format below: 31. Segmented Net Income. Valdez Co

Question

Question:

Please answer in the format below:

31. Segmented Net Income. Valdez Company has two divisions-Appliances and Tools. The following segmented financial information is for the most recent fiscal year ended December 31. Sales Cost of goods sold Allocated overhead Selling and administrative expenses Assume the tax rate is 30 percent. Required: a. Prepare a segmented income statement using the format presented in Figure 11.3. Include the profit margin Appliances Division Tools Division $1,000,0oo 430,00O 125,000 200,00o $3,000,0oo 1,600,00o 375,000o 250,000 ratio for each division at the bottom of the segmented income statement. b. Using net income as the measure, which division is most profitable? Explain why this conclusion might be misleadin c. What does the profit margin ratio tell us about each division? Why do organizations often use profit margiin ratio to evaluate division performance rather than simply using net income?

Explanation / Answer

a) Appliances Division Tools Division Sales 3000000 1000000 Cost of goods sold 1600000 430000 Gross margin 1400000 570000 Allocated overhead 375000 125000 Selling and administrative expenses 250000 200000 Operating income 775000 245000 Income tax expense (30%) 232500 73500 Net Income 542500 171500 Profit margin ratio 18.08% 17.15% b) Using net income as the measure, Appliances division is most profitable. Net income is an absolute figure. It does not reveal the efficiency with which sales are converted into net income. Hence, it is not a proper measure to judge the profitability of a division or segment. c) The profit margin ratio of Appliances division is marginally higher than that of the Tools division. Profit margin ratio is a relative figure, which, tells how much of each dollar sales is realized as profit. It is an indication of the efficiency with which the operations are managed. In contrast net income is an absolute figure and does not indicate the operational efficiency. If net income is used for evaluation, it might result in inefficient units getting a better rating than efficient units. Hence, firms prefer to use profit margin ratio as a measure to evaluate divisional performance.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.