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EXERCISE 6-17 Working with a Segmented Income Statement [L06-4] Refer to the data in Exercise 6-16. Assume that Minneapolis' sales by major market are: .......................................... Variable expenses ................................ Contribution margin ............................... Traceable fixed expenses ........................ Market segment margin .......... Common fixed expenses not traceable to markets ..... Office segment margin Minneapolis $300,000 100% 180,000 60% 120,000 40% 33,000 11% 87,000 29% 15,000 5% $ 72,000 24% Market Medical Dental $200,000 100% $100,000 100% 128,000 64% 52,000 52% 72,000 36% 48,000 48% 12,000 6% 21,000 21% $ 27,000 27% 30% The company would like to initiate an intensive advertising campaign in one of the two market segments during the next month. The campaign would cost $5,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $40,000 or increase sales in the Dental market by $35,000. Required: 1. In which of the markets would you recommend that the company focus its advertising cam- paign? Show computations to support your answer. 2. In Exercise 6-16, Minneapolis shows $48,000 in traceable fixed expenses. What happened to the $48,000 in this exercise?

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Jean Keeling
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EXERCISE 6-16 Working with a Segmented Income Statement; Break-Even Analysis [L06-4, L06-5] Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classi- fies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company's most recent year is given below: Sales ........ Variable expenses .......... Contribution margin ........................... Traceable fixed expenses ....................... Office segment margin .............................. Common fixed expenses not traceable to offices ..... Net operating income ...... Total Company $450,000 100% 225,000 50% 225,000 50% 126,000 28% 99,000 22% 63,000 $ 36,000 8% Office Chicago Minneapolis $150,000 100% $300,000 100% 45,000 30% 180,000 60% 105,000 70% 120,000 40% 78,000 52% 48,000 $ 27,000 18% $ 72,000 24% -16% 1496 Required: 1. Compute the company wide break-even point in dollar sales. Also, compute the break-even point for the Chicago office and for the Minneapolis office. Is the company wide break- even point greater than, less than or equal to the sum of the Chicago and Minneapolis break-even points? Why? By how much would the company's net operating income increase if Minneapolis increased its sales by $75,000 per year? Assume no change in cost behavior patterns. 3. Refer to the original data. Assume that sales in Chicago increase by $50,000 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs. a. Prepare a new segmented income statement for the company using the above format. Show both amounts and percentages. b. Observe from the income statement you have prepared that the contribution margin ratio for Chicago has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment mar- gin ratio?

When Mr. Ding L. Berry, presidentand chief executive of Berry, Inc., first saw the segmented incomestatement below, he flew into his usual rage: %u201CWhen will weever start showing a real profit? I%u2019m starting immediate stepsto eliminate those two unprofitable lines!%u201D

Product Lines
Total U V W
Sales $ 255,000 $ 102,000 $ 78,000 $ 75,000
Variable expenses 116,000 33,000 35,000 48,000
Contribution margin 139,000 69,000 43,000 27,000
Traceable fixed expenses* 97,000 26,000 33,000 38,000
Common expenses, allocated 32,200 15,000 12,500 4,700
Net operating income (loss) $ 9,800 $ 28,000 $ (2,500 ) $ (15,700 )
*

These traceable expenses could beeliminated if the product lines to which they are traced werediscontinued.
Required:
a.

Prepare a segmented income report,without the allocation of common fixed expenses. (Input all expenses as positive values exceptnegative amounts which should be indicated by a minus sign. Omitthe "$" sign in your response.)
Product Lines
Total U V W
Sales $ $ $ $
Variable expenses
Contribution margin
Traceable fixed expenses
Segment margin $ $ $
Common expenses, allocated
Net operating income (loss) $
b. Recommend which segments, if any, should be eliminated.
V
W
U

EXERCISE 12-2 Dropping or Retaining a Segment L012-2] The Regal Cycle Company manufactures three types of bicycles- a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Dirt Bikes Total Mountain Bikes Racing Bikes $300,000 $90,000 $150,000 $60,000 120,000 180,000 27,000 63,000 60,000 90,000 33,000 27,000 10,000 14,000 6,000 Sales .......... Variable manufacturing and selling expenses.... Contribution margin Fixed expenses: Advertising, traceable ......... Depreciation of special equipment ........ Salaries of product-line managers Allocated common fixed expenses". Total fixed expenses ............ Net operating income (loss) ...... 30,000 23,000 6,000 9,000 8,000 35,000 12,000 13,000 10,000 60,000 148,000 $ 32,000 18,000 46,000 $17,000 30,000 66,000 $ 24,000 12,000 36,000 $ (9,000) *Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a rec- ommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: 1. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.

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