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    Seatwork 4 - Decentralized Operations

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    JessaLyza Cordova
    The document contains two problems involving segmented income statements for companies with decentralized operations. The first problem asks how net operating income would change if sales increased in one segment. The second problem provides a segmented income statement for a wholesale DVD distributor divided by geographic markets and calculates how net operating income would change if sales increased in one market through additional advertising.

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    Seatwork 4 - Decentralized Operations

    Uploaded by

    JessaLyza Cordova
    179 views3 pages
    The document contains two problems involving segmented income statements for companies with decentralized operations. The first problem asks how net operating income would change if sales increased in one segment. The second problem provides a segmented income statement for a wholesale DVD distributor divided by geographic markets and calculates how net operating income would change if sales increased in one market through additional advertising.

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    Decentralized Operations

    Original Title

    Seatwork 4- Decentralized Operations

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    The document contains two problems involving segmented income statements for companies with decentralized operations. The first problem asks how net operating income would change if sales increased in one segment. The second problem provides a segmented income statement for a wholesale DVD distributor divided by geographic markets and calculates how net operating income would change if sales increased in one market through additional advertising.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    179 views3 pages

    Seatwork 4 - Decentralized Operations

    Uploaded by

    JessaLyza Cordova
    The document contains two problems involving segmented income statements for companies with decentralized operations. The first problem asks how net operating income would change if sales increased in one segment. The second problem provides a segmented income statement for a wholesale DVD distributor divided by geographic markets and calculates how net operating income would change if sales increased in one market through additional advertising.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    CANDELARIO, XAVIER ACE

    BSAI-2-1

    SEATWORK 4

    DECENTRALIZED OPERATIONS

    Problem 1 (Working with a Segmented Income Statement)

    Purple Associates is a consulting firm that specializes in information systems for construction and landscaping companies.
    The firm has two offices one in Manila and one in Cebu. The firm classifies the direct costs of consulting jobs as variable
    costs. A segmented income statement for the company's most recent year is given below:

    Total Company Manila Cebu


    Amount % Amount % Amount %
    Sales 750,000 100% 150,000 100% 600,000 100%
    Less variable expenses 405,000 54 45,000 30 360,000 60
    Contribution margin 345,000 46 105,000 70 240,000 40
    Less traceable fixed cost 168,000 22.4 78,000 52 90,000 15
    Segment margin 177,000 23.6 27,000 18 150,000 25
    Less common fixed cost 120,000 16
    Net operating income 57,000 7.6

    1. By how much would the company's net operating income increase if Cebu increased it sales by P75,000 per year?
    Assume no change in cost behavior patterns.

    CM = P 75,000 x 40%

    CM = P 30,000

    P 75,000 * 40% CM ratio = P 30,000 increased contribution margin in Cebu. Since the fixed costs in the office and in the
    company as a whole will not change, the entire P 30,000 would result in increased net operating income for the company.

    2. Refer to the original data. Assume that sales in Manila increase by P50,000 next year and that sales in Cebu remain
    unchanged. Assume no change in fixed costs.

    • Prepare a new segmented income statement for the company using the format above. Show both amounts and
    percentages.

    Total Company Manila Cebu


    Amount % Amount % Amount %
    Sales 800,000 100% 200,000 100% 600,000 100%
    Less variable expenses 420,000 52.5 60,000 30 360,000 60
    Contribution margin 380,000 47.5 140,000 70 240,000 40
    Less traceable fixed cost 168,000 2.1 78,000 39 90,000 15
    Segment margin 212,000 26.5 62,000 31 150,000 25
    Less common fixed cost 120,000 15
    Net operating income 92,000 11.5%
    Problem 2 (Segmented Income Statement)

    Sterling Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most
    recent monthly income statement: Sales P1,500,000; Variable expenses, 588,000; fixed expenses, 945,000. In an effort to
    isolate the problem, the president has asked for an income statement segmented by geographic market. Accordingly, the
    Accounting Department has developed the following data:

    Geographic Market
    East Central West
    Sales P 400,00 P 600,000 P 500,000
    Variable expenses, as percent of sales 52% 30% 40%
    Traceable fixed cost P 240,000 P 330,000 P 200,000

    Required: Prepare an income statement segmented by geographic market, as desired by the president. Show both Amount
    and Percent columns for the company as a whole and for each geographic market. Carry percentage computations to one
    decimal place.

    The company’s sales manager believes that sales in Central market could be increased by 15% if advertising would be
    increased by P25,000 each month. Show computation to support your answer.

    Geographic Market
    Total Company East Central West
    Amount % Amount % Amount % Amount %
    Sales P1,500,000 100 P 400,000 100 P 600,000 100 P 500,000 100
    Less variable 588,000 39.2 208,000 52 180,000 30 200,000 40
    expenses
    Contribution margin 912,000 60.8 192,000 48 420,000 70 300,000 60
    Less traceable fixed 770,000 51.3 240,000 60 330,000 55 200,000 40
    expenses
    Geographic market 142,000 9.5 P 48,000 12 P 90,000 15 P 100,000 20
    segment margin
    Less common fixed 175,000 11.7
    expenses not
    traceable to
    geographic markets
    Net operating P 33,000 2.2
    income
    Incremental Sales (P 600,000 x15%) P 90,000
    Multiply by: Contribution margin ratio 70%
    Incremental contribution margin 63,000
    Less incremental advertising expense 25,000
    Incremental net operating income P 38,000

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