Question

Income Statements Segmented by Territory Script, Inc., has two product lines. The September income statements of each product line and the company are as follows: SCRIPT, INC. Product Line and Company Income Statements For Month of September Pens Pencils Total Sales $25,000 $30,000 $55,000 Less variable expenses (10,000) (12,000) (22,000) Contribution margin 15,000 18,000 33,000 Less direct fixed expenses (8,000) (6,000) (14,000) Product margin $7,000 $12,000 $19,000 Less common fixed expenses (6,000) Net income $13,000 Pens and pencils are sold in two territories, Florida and Alabama, as follows: Pen sales Pencil sales Total sales Florida Alabama $11,000 $14,000 13,000 17,000 $24,000 $31,000 The preceding common fixed expenses are traceable to each territory as follows: $2,000 Florida fixed expenses Alabama fixed expenses Home office administration fixed expenses Total common fixed expenses 3,000 1,000 $6,000

Answer 1

Answer Script Inc Territory & Company Income Statements For the Month of September Particulars Florida Albama Company Totals Sales Pens 11,000 $ 14,000 $ 25,000 Pencils 13,000 $ 17,000 $ 30,000 Total Sales 24,000 $ 31,000 $ Variable costs Pens 4,400 $ 5,600 $ 10,000 Pencils 5,200 $ 6,800 $ 12,000 Total 9,600 $ 12,400 $ 22,000 Contributions Margin 14,400 $ 18,600 $ 33,000 Direct Fixed Expenses $ 6,120 $ 7,880 $ 14,000 Territory Margin $ 8,280 $ 10,720 $ 19,000 Common Fixed Expenses Pens 2,272 Pencils 2,728 Home office 1,000 Total $ 6,000 Net Income $ 13,000 Calculations $ Pen Bifurcation of Variable Expenses of Pens & Pencils as follows into territories based on the Revenue / Sales share Since Variable expenses are directly in proportion to the revenue Sales Florida Alabama Pen Sales 11,000 $ 14,000 Pencil Sales 13,000 $ 17,000 Total 24,000 $ 31,000 Category Variable Expenses 10,000 Pencil 12,000 Total 22,000 Distribution of Variable Expenses Based on Sales ratio Variable Expenses Florida Alabama Pen 4,400 $ 5,600 Pencil 5,200 $ 6,800 Total 9,600 $ 12,400 Formula used for Above calculation Sales of Pen in Florida or Albama * Variable Expenses of Pen / (sum of Pen Sales) Sales of Pencils in Florida or Albama * Variable Expenses of Pencils/(sum of Pencils Sales) Bifurcation of Direct Fixed Expenses of Pens & Pencils as follows into territories based on the Revenue / Sales share Sales Florida Alabama Pen Sales 11,000 $ 14,000 Pencil Sales 13,000 $ 17,000 Total 24,000 $ 31,000 Category Direct Expenses Pen 8,000 Pencil 6,000 Total 14,000 Distribution of Direct Expenses Based on Sales ratio Direct Expenses Florida Alabama Pen 3,520 $ 4,480 Pencil 2,600 $ 3,400 Total 6,120 $ 7,880 Formula used for Above calculation Sales of Pen in Florida or Albama * Direct Fixed Expenses of Pen / sum of Pen Sales) Sales of Pencils in Florida or Albama * Direct fixed Expenses of Pencils / (sum of Pencils Sales) $ Common Fixed Expenses - Bifurcation Although, territory wise Bifurcation is given however to complete the table we need the bifurcation Segment wise. This can be done based on the Sales ratio method as we did above. Sales Florida Alabama Pen Sales 11,000 $ 14,000 Pencil Sales 13,000 $ 17,000 Total 24,000 $ 31,000 Category Common Fixed Expenses Florida 2,000 Albama 3,000 Total 5,000 Common Fixed Expenses Florida Alabama Total Pens 917 $ 1,355 $ 2,272 Pencils 1,083 $ 1,645 $ 2,728 Total 2,000 $ 3,000 $ 5,000 Answer to b Because costs that may be directly traceable to one segment base (territory) may not be directly traceable to another segment base Please note that a segment for example territory can contain multiple products and similarly a segment say product may be spread over various territories. Which is why direct expenses traced to a particular territory may not be directly allocated to another segment base.