BADM 3315
Quiz 6 Chapter 7 Example Guide
1. Exercise 7-4 Basic Segmented Income Statement [LO7-4]
Royal Lawncare Company produces and sells two packaged products—Weedban and Greengrow. Revenue and cost
information relating to the products follow:
Product
Weedban
Greengrow
$
10.00 $
37.00
$
2.20 $
12.00
$ 131,000 $ 33,000
Selling price per unit
Variable expenses per unit
Traceable fixed expenses per year
Common fixed expenses in the company total $104,000 annually. Last year the company produced and sold
39,500 units of Weedban and 21,000 units of Greengrow.
Required:
Prepare a contribution format income statement segmented by product lines.
Product Line
Total
Company
Sales
Weedban
Greengrow
$1,172,000
$395,000
$777,000
Variable expenses
338,900
86,900
252,000
Contribution margin
833,100
308,100
525,000
Traceable fixed expenses
164,000
131,000
33,000
Product line segment margin
669,100
$177,100
$492,000
Common fixed expenses not traceable to
products
104,000
Net operating income
$565,10
Explanation:
Sales:
Weedban: 39,500 units × $10.00 per unit = $395,000.
Greengrow: 21,000 units × $37.00 per unit = $777,000.
Variable expenses:
Weedban: 39,500 units × $2.20 per unit = $86,900.
Greengrow: 21,000 units × $12.00 per unit = $252,000.
2. Exercise 7-11 Segmented Income Statement [LO7-4]
Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as
shown by its most recent monthly contribution format income statement:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income (loss)
$
$
1,581,000
678,600
902,400
993,000
(90,600)
In an effort to resolve the problem, the company would like to prepare an income statement segmented by
division. Accordingly, the Accounting Department has developed the following information:
Sales
Variable expenses as a percentage of sales
Traceable fixed expenses
$
$
East
391,000
60
280,000
$
%
$
Division
Central
640,000
35 %
322,000
$
$
West
550,000
40
205,000
%
Required:
1. Prepare a contribution format income statement segmented by divisions.
2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $23,000
based on the belief that it would increase that division's sales by 19%. Assuming these estimates are
accurate, how much would the company's net operating income increase (decrease) if the proposal is
implemented?
2-b. Would you recommend the increased advertising?
Complete this question by entering your answers in the tabs below.
Required 1
Prepare a contribution format income statement segmented by divisions.
Division
Sales
Variable expenses
Contribution margin
Traceable fixed expenses
Divisional segment margin
Common fixed expenses not traceable to
divisions
Net operating loss
Total
Company
$1,581,000
678,600
F902,400
807,000
East
Central
West
$391,000 $640,000 $550,000
234,600 224,000
F156,400 F416,000
280,000 322,000
220,000
F330,000
205,000
F95,400 F$(123,600) F$94,000 F$125,000
186,000
F$(90,600)
Explanation 1:
Common fixed expenses not traceable to divisions = $993,000 – $807,000 = $186,000.
Required 2A
The Marketing Department has proposed increasing the West Division's monthly advertising by $23,000
based on the belief that it would increase that division's sales by 19%. Assuming these estimates are
accurate, how much would the company's net operating income increase (decrease) if the proposal is
implemented? (Do not round intermediate calculations.)
Net operating income will increase
by
$39,700
Explanation 2a.
Incremental West Division sales ($550,000 × 19%)
Contribution margin ratio ($330,000 ÷ $550,000)
Incremental contribution margin
Less incremental advertising expense
Incremental net operating income
$
×
$
Required 2B
Would you recommend the increased advertising?
Yes
No
Explanation 2b.
Yes, the advertising program should be initiated.
$
104,500
60
62,700
23,000
39,700
%