Financial Accounting
Financial Accounting
18th Edition
ISBN: 9781260706307
Author: Jan Williams
Publisher: Mcgraw-hill Higher Education (us)
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Chapter 22, Problem 4BP

a.

To determine

Prepare the January income statement for the Northern Territory by product line.

a.

Expert Solution
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Explanation of Solution

Prepare the January income statement for the Northern Territory by product line as follows:

Incorporation F
Responsibility Income Statement
Northern Territory
For January
Northern TerritoryEconomyEfficiency
DollarsPercentDollarsPercentDollarsPercent
Sales$1,500,000100.0$500,000100.0$1,000,000100.0
Variable costs850,00056.7150,00030.0700,00070.0
Contribution margin$650,00043.3$350,00070.0$300,00030.0
Fixed costs traceable to product lines290,00019.390,00018.0200,00020.0
Division responsibility margin$360,00024.0$260,00052.0%$100,00010.0%
Common fixed costs125,0008.3
Operating Income$235,00015.7%

Table (1)

b.

To determine

Prepare the January income statement for the company showing profits by sales territories.

b.

Expert Solution
Check Mark

Explanation of Solution

Prepare the January income statement for the company showing profits by sales territoriesas follows:

Incorporation F
Responsibility Income Statement
For January
Entire CompanyNorthern TerritorySouthern Territory
DollarsPercentDollarsPercentDollarsPercent
Sales$2,300,000100.0$1,500,000100.0 $800,000100.0
Variable costs         1,202,00052.3         850,00056.7         352,00044.0
Contribution margin $1,098,00047.7 $650,00043.3 $448,00056.0
Fixed costs traceable to territories         705,00030.7 415,00027.6         290,00036.0
Division responsibility margin $393,00017.1 $235,00015.7% $158,00020.0%
Common fixed costs         140,0006.1    
Operating Income $253,00011.0%    

Table (2)

Calculate the fixed costs traceable to Northern territory:

(Fixed costs traceable to Northern territory)=(Common fixed costs of Northern territory+Traceable fixed costs)=$125,000+$290,000=$415,000

c.

To determine

Compute the rate of return on average assets earned in each sales territory during the month of January.

c.

Expert Solution
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Explanation of Solution

Compute the rate of return on average assets earned in each sales territory during the month of January as follows:

Northern TerritorySouthern Territory
Each territory’s return on assets:
Responsibility margin$235,000$158,000
Divide: Average assets16,000,00010,000,000
Return on Assets1.5%1.6%

Table (3)

d.

To determine

Explain about the amount of $125,000 of fixed costs that were included in the Income statement for Northern territory in Part b.

d.

Expert Solution
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Explanation of Solution

Explain about the amount of $125,000 of fixed costs that were included in the Income statement for Northern territory in Part bas follows:

At some level of the organization, all costs are traceable. The common fixed costs of $125,000 were not traceable to product lines within the Northern territory, but they are traceable to the territory itself. Hence, the common fixed costs of $125,000 are combined with the other fixed costs of the Northern territory and are represented as “Fixed costs traceable to territories” in the Income statement divided by territories.

e.

To determine

Explain the product on which the manager should focus this advertising campaign.

e.

Expert Solution
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Explanation of Solution

Explain the product on which the manager should focus this advertising campaignas follows:

EconomyEfficiency
Incremental revenue$100,000 $100,000 
Less: Incremental variable costs (30%, 70%)30,00070,000
Incremental increase in contribution margin (70%, 30%)$70,000$30,000
Less: Incremental fixed costs40,00040,000
Increase (decrease) in responsibility margin$30,000$(10,000)

Table (4)

The product line,which will generate the greatest contribution margin relatively to the additional fixed advertising cost, should be focused by the manager. Hence, from the above computed table, it can be concluded that the manager should focus this advertising campaign on Product Economy.

f.

To determine

Explain the territory which would be the best candidate for this investment.

f.

Expert Solution
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Explanation of Solution

Explain the territory which would be the best candidate for this investmentas follows:

The top management, in the long-run investment type described, must be aware about the ability of the investment to cover both the fixed costs as well as the variable costs. Hence, such measures should be looked by the management as return on assets and responsibility margin. To evaluate the relative profitability of each territory, return on investment techniques may be used by the management, as it knows the cost of assets currently invested in each sales territory. From part c, it can be concluded that, Southern territory, which offers higher return on assets of 1.6% per month when compared to Northern territory which offers return on assets of 1.5% per month, appears to offer the higher potential return on investment.

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