The most recent monthly income statement for Reston Company is given below: Mana
ID: 2347988 • Letter: T
Question
The most recent monthly income statement for Reston Company is given below: Management is disappointed with the company's performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following: The company is divided into two sales territories - Central and Eastern. The Central Territory recorded $400.000 in sales and $208,000 in variable expenses during May. The remaining sales and variable expenses were recorded in the Eastern Territory. Fixed expenses of $160.000 and $130,000 are traceable to the Central and Eastern Territories, respectively. The rest of the fixed expenses are common to the two territories. The company sells two products - Awls and Pows. Sales of Awls and Pows totaled $100,000 and $300,000 respectively, in the Central Territory during May. Variable expenses are 25% of the selling price for Awls and 61% for Pows. Cost records show that $60,000 of the Central Territory's fixed expenses are traceable to Awls and $54,000 to Pows. with the remainder common to the two products. Prepare segmented income statements, first showing the total company broken down between sales territories and then showing the Central Territory broken down by product line. Show both Amount and Percent columns for the company in total and for each segment Round percentage computations to one decimal place. Look at the statement you have prepared showing the total company segmented by sales territory. What points revealed by this statement should be brought to the attention of management? Over what range will a transfer price be negotiated?Explanation / Answer
Central % Eastern % Total %
Sales $400,000 100.0 $500,000 100.0 $900,000 100.0
Less : Variable Exp. $208,000 52.0 $200,000 40.0 $408,000 45.3
Contribution Margin $192,000 48.0 $300,000 60.0 $492,000 54.7
Less: Traceable FC $160,000 40.0 $130,000 26.0 $290,000 51.7
Segment profit $32,000 8.0 $170,000 34.0 $202,000 3.0
Less: Common FC $175,000
Net Operating
Income $27,000
2) The traceable fixed cost for Central territory is much more higher than Eastern territory. Eastern territory incurs $130,000 as fixed cost against sales of $500,000 whereas Central territory incurs $160,000 against sales of $400,000 only. As such segment profit for Central trrritory records only 8% against segment profit of 34% recorded for Eastern territory.