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NU Pacific Rim Industries Case Study

NU Pacific Rim Industries Case Study


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.

               Product Lines

                                                                                      Furniture            Sports              Appliances             Total

Production and sales in units                                        160,000              180,000            160,000                   500,000

Average selling price per unit                                        $8.00                  $20.00              $15.00

Average variable manufacturing cost per unit               4.00                     9.50                  8.25

Average variable selling expense per unit                     2.00                     2.50                   2.25

Fixed manufacturing overhead, excluding depreciation                                                                                 $500,000

Depreciation of plant and equipment                                                                                                               400,000

Administrative and selling expense                                                                                                                1,160,000

1. 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.

2. 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.

3. 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.

                                                         Manufacturing Staff                           Sales Staff

Furniture                                                 $120,000                             United States   $60,000

Sports                                                       140,000                              Canada            100,000

Appliances                                                  80,000                              Asia                  250,000

The division managers were able to provide reliable sales percentages for their product lines by geographical area.

                                                                       Percentage of Unit Sales

                                                    United States                  Canada                    Asia

Furniture                                            30%                               20%                       50%

Sports                                                50%                               30%                       20%

Appliances                                         30%                               10%                       60%

          Murphy prepared the following product-line income statement based on the data presented above

                                                                       PACIFIC RIM INDUSTRIES

                         Segmented Income Statement by Product Lines For the Fiscal Year Ended April 30, 202x

                                                               Furniture             Sports              Appliances         Unallocated         Total

Sales in units                                           160,000               180,000            160,000         

Sales                                                   $1,280,000           $3,600,000        $2,400,000                         —     $7,280,000

Var. manf. & selling costs                        960,000            2,160,000          1,680,000                         —      4,800,000

Contribution margin                           $320,000             $1,440,000         $720,000                           —    $2,480,000

Fixed costs:

          Fixed manf. o/h                        $100,000              $225,000           $175,000                            —      $500,000

          depreciation                               128,000               144,000              128,000                            —        400,000

         Admin & selling exp.                   120,000               140,000                80,000              820,000           1,160,000

         Total fixed                                 $348,000               $509,000             $383,000          $820,000          $2,060,000

  Operating income (loss)                  $(28,000)               $931,000             $337,000         $(820,000)            $420,000


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.

As a result of the information disclosed by both segmented income statements (by product line and by geographic area), recommend areas where Pacific Rim Industries should focus its attention in order to improve corporate profitability. 

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