Description
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
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.
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.
