Pacific Rim Industries is a diversified company whose products are marketed both
ID: 2546809 • Letter: P
Question
Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The company’s major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacific Rim’s board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement.
Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings.
The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.
Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.
There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.
The division managers were able to provide reliable sales percentages for their product lines by geographical area.
Murphy prepared the following product-line income statement based on the data presented above.
Required:
Prepare a segmented income statement for Pacific Rim Industries based on the company’s geographical areas. The statement should show the operating income for each segment. (Round intermediate calculations to 2 decimal places (i.e. 0.1234 is 12.34%) and final answers to the nearest dollar amount.)
Product Lines Furniture Sports Appliances Total Production and sales in units 216,000 202,500 216,000 634,500 Average selling price per unit $ 7.00 $ 18.00 $ 17.00 Average variable manufacturing cost per unit 3.00 9.50 11.50 Average variable selling expense per unit 2.00 2.50 2.75 Fixed manufacturing overhead,excluding depreciation $ 528,000 Depreciation of plant and equipment 507,600 Administrative and selling expense 1,180,000
Explanation / Answer
Solution:
PACIFIC RIM INDUSTRIES
Segmented Income Statement by Geographic Areas
For the Fiscal Year Ended April 30, 20x0
Geographic Areas
United States
Canada
Asia
Unallocated
Total
Sales in units (WN1)
Furniture
108,000
21,600
86,400
216,000
Sports
81,000
81,000
40,500
202,500
Appliances
64,800
64,800
86,400
216,000
Total unit sales
253,800
167,400
213,300
634,500
Revenue(WN2)
Furniture
756,000
151,200
604,800
$1,512,000
Sports
1,458,000
1,458,000
729,000
3,645,000
Appliances
1,101,600
1,101,600
1,468,800
3,672,000
Total revenue
$3,315,600
$2,710,800
$2,802,600
$8,829,000
Variable costs(WN3)
Furniture
540,000
108,000
432,000
$1,080,000
Sports
972,000
972,000
486,000
2,430,000
Appliances
567,000
567,000
756,000
1,890,000
Total variable costs
$2,079,000
$1,647,000
$1,674,000
$5,400,000
Contribution margin
(Total Revenue – Total Variable Cost)
$1,236,600
$1,063,800
$1,128,600
$3,429,000
Fixed costs(WN4)
Manufacturing overhead
203,280
161,040
163,680
$528,000
Depreciation
507,600
Administrative and selling expenses
1,180,000
Total fixed costs
$486,320
$414,960
$604,320
$2,215,600
Operating income (loss)
$750,280
$648,840
$524,280
($710,000)
$ 1,213,400
Working Note (WN):
1) Sales in unit = Allocated in the given ratio:
The division managers were able to provide reliable sales percentages for their product lines by geographical area.
Percentage of Unit Sales
United States (Units)
Canada (Units)
Asia (Units)
Furniture (216,000 units)
50%
108,000
10%
21,600
40%
86,400
Sports (202,500 units)
40%
81,000
40%
81,000
20%
40,500
Appliances (216,000)
30%
64,800
30%
64,800
40%
86,400
2) Revenue = on the basis of above allocated units:
Revenue
United States ($)
Canada ($)
Asia ($)
Furniture ( Selling Price $ 7 per unit)
108,000
756,000
21,600
151,200
86,400
604,800
Sports ( Selling Price $ 18 per unit)
81,000
1,458,000
81,000
1,458,000
40,500
729,000
Appliances ( Selling Price $ 17 per unit)
64,800
1,101,600
64,800
1,101,600
86,400
1,468,800
3) Variable manufacturing and selling costs = Variable cost is that cost that varies according to the number of units produced. In this question, all the units produced are sold. So, variable cost will be allocated in the ration given for units sold.
Allocation of Variable manufacturing and selling cost
United States ($)
Canada ($)
Asia ($)
Furniture ($ 1,080,000)
50%
540,000
10%
108,000
40%
432,000
Sports ( $ 2,430,000)
40%
972,000
40%
972,000
20%
486,000
Appliances ( $ 1,890,000)
30%
567,000
30%
567,000
40%
756,000
4)
(a)Manufacturing overhead (Given) The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs .The total variable cost is $2,079,000, $1,647,000 and $1,674,000 for United states, Canada and Asia respectively. So, the ratio without simplifying is 2079: 1647: 1674. For the calculation denominator will be (2079 + 1647 + 1674= 5,400).
Allocation of Fixed Manufacturing overhead
United States ($)
Canada ($)
Asia ($)
Fixed Manufacturing overhead ($ 528,000)
=528,000 X 2079/ 5400
= $ 203,280
=528,000 X 1647/ 5400
= $ 161,040
= 528,000 X 1674/ 5400
= $ 163,680
(b)Depreciation (Given) Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.
The total units produced are 253,800, 167,400 and 213,300for United States, Canada and Asia respectively. So, the ratio without simplifying is 2538: 1674: 2133. For the calculation denominator will be (2538 + 1647 + 2133= 6,345).
Allocation of Depreciation
United States ($)
Canada ($)
Asia ($)
Depreciation ($ 507,600)
=507,600X 2538/ 6,345
= $ 203,040
=507,600X 1674/ 6,345
= $ 133,920
= 507,600X 2133/ 6,345
= $ 170,640
(c) Administrative and selling expenses (Given): There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.
So, Sales staff expenses are allocated to United States, Canada and Asia is $ 80,000, $ 120,000 and $ 270,000 respectively. So, Total allocated cost is $ 470,000
Unallocated Cost= Total Administrative and selling expenses – Allocated Cost
= $ 1,180,000 - $ 470,000
= $ 710,000
PACIFIC RIM INDUSTRIES
Segmented Income Statement by Geographic Areas
For the Fiscal Year Ended April 30, 20x0
Geographic Areas
United States
Canada
Asia
Unallocated
Total
Sales in units (WN1)
Furniture
108,000
21,600
86,400
216,000
Sports
81,000
81,000
40,500
202,500
Appliances
64,800
64,800
86,400
216,000
Total unit sales
253,800
167,400
213,300
634,500
Revenue(WN2)
Furniture
756,000
151,200
604,800
$1,512,000
Sports
1,458,000
1,458,000
729,000
3,645,000
Appliances
1,101,600
1,101,600
1,468,800
3,672,000
Total revenue
$3,315,600
$2,710,800
$2,802,600
$8,829,000
Variable costs(WN3)
Furniture
540,000
108,000
432,000
$1,080,000
Sports
972,000
972,000
486,000
2,430,000
Appliances
567,000
567,000
756,000
1,890,000
Total variable costs
$2,079,000
$1,647,000
$1,674,000
$5,400,000
Contribution margin
(Total Revenue – Total Variable Cost)
$1,236,600
$1,063,800
$1,128,600
$3,429,000
Fixed costs(WN4)
Manufacturing overhead
203,280
161,040
163,680
$528,000
Depreciation
203,040 133,920 170,640507,600
Administrative and selling expenses
80,000 120,000 270,000 710,0001,180,000
Total fixed costs
$486,320
$414,960
$604,320
710,000$2,215,600
Operating income (loss)
$750,280
$648,840
$524,280
($710,000)
$ 1,213,400
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