Shannon Company segments its income statement into its North and South Divisions

Question

Shannon Company segments its income statement into its North and South Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $500,000, 46%, and $10,000, respectively. The North Division’s contribution margin and contribution margin ratio are $150,000 and 50%, respectively. The South Division’s segment margin is $30,000. The company has $90,000 of common fixed expenses that cannot be traced to either division.

Required:

Prepare an income statement for Shannon Company that uses the contribution format and is segmented by divisions. In addition, for the company as a whole and for each segment, show each item on the segmented income statements as a percent of sales. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))

Explanation / Answer

the following is the required segmented income statement:

(amount derivations follow the table)

notes:

explanation:

north division's contribution margin = $150,000

contribution margin ratio = 50%

=>North division sales = $150,000 / 50%

=>$300,000.

south division sales = total sales - north division sales

=.$500,000 - $300,000

=>$200,000.

now,

consider

net operating income = $10,000.

commonfixed expenses = $90,000.

=>total territorial segment margin = net operating income + commonfixed expenses

=>$100,000.

given that south division segment margin = $30,000

=> north division segment margin = territorial segment margin - south segment margin =>$100,000 - $30,000

=>$70,000.

now,

south division contribution margin = overall contribution margin - north division contribution margin

=> ($500,000 *46%) - ($150,000)

=>$230,000 - 150,000

=>$80,000.

now,

north division's traceable fixed expense =contribution margin - segment margin =>$150,000- $70,000

=>$80,000.

south divisions traceable fixed expense = contribution margin - segment margin =>80,000 - 30,000=>$50,000.

SOuth division variable expenses => sales - contribution margin = $200,000 - 120,000 =>$80,000.

now,

percentages :

every amount is experessed as a percentage of respective divisions sale amount or total company sale amount as the case may be.

Tota company North South Amount % Amount % Amount % Sales $500,000 100.0% $300,000 100.0% $200,000 100.0% Variable expenses 270,000 54.0% 150,000 50.0% 120,000 60.0% contribution margin 230,000 46.0% 150,000 50.0% 80,000 40.0% Traceable fixed expenses 130,000 26.0% 80,000 26.7% 50,000 25.0% Territorial segment margin 100,000 20.0% $70,000 23.3% $30,000 15.0% Common fixed expenses 90,000 18.0 Net operating income $10,000 2.0

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