Segmented income statement-Friends Association is a consulting
Segmented income statement exercise Exercise 1 Friends Association is a consulting firm that specializes in information systems for construction and landscaping companies. The firm has two offices-one in Houston and one in Dallas. 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: Sales Less: Variable expenses Contribution margin Less: traceable fixed expenses Office segment margin Less: common fixed expenses Net operating income Total $750,000 % 100% Houston $150,000 Dallas $600,000 45,000 105,000 78,000 % 100 % 30 70 52 360,000 240,000 90,000 % 100 % 60 40 15 405,000 345,000 168,000 54 46 22.4 177,000 120,000 23.6 16 $27,000 18 150,000 25 $57,000 7.6% Required: 1. By how much would the company’s net operating income increase if d Dallas increased its sales by $75,000 per year? (assume no change in cost behavior patterns) 2. Refer to original data. Assume that sales in Houston increase by $50,000 next year and sales in Dallas remain unchanged. (Assume no change in fixed cost). a. Prepare a new segmented income statement for the company using the format above. b. Observe from the income statement you have prepared that the CM ratio for Houston has remained unchanged at 70%, but the segment margin ratio has changed. How do you explain the change in segment margin ratio? Prof. Dr. Eltemsahi Page 1 Exercise 2 Refer to Exercise 1; assume that Dallas’s sales by major market are as follows: Dallas % Sales $600,000 100% Constructio n Clients $400,000 % Less: Variable expenses Contribution margin Less: traceable fixed expenses Market segment margin Less: common fixed expenses office segment margin 360,000 240,000 72,000 60 40 12 260,000 140,000 20,000 100 % 65 35 5 168,000 18,000 28 3 $120,000 30% $150,000 Landscapin g Clients $200,000 % 25% 100,000 100,000 52,000 100 % 50 50 26 $48,000 24% The company would like to initiate an intensive advertising campaign in one of the two markets during the next month. The campaign would cost $8,000. Marketing studies indicate that such a campaign would increase sales in Construction market by $70,000 or increase sales in the Landscaping market by $60,000. Required: 1. In which of the markets would you recommend that the company focus its advertising campaign? 2. Refer to Exercise 1; Dallas shows $90,000 in traceable fixed expenses. What happ
