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Tutorial 11738

Vulcan Company's contribution format income statement for June is given below: Vulcan Company Income Statement For the Month Ended June 30 Sales ...

Question:

Vulcan Company\'s contribution format income statement for June is given below: 

Vulcan Company

Income Statement

For the Month Ended June 30

Sales                                                     $988,000 

Variable expenses                          437,684 

Contribution margin                      550,316 

Fixed expenses                                                530,556 

Net operating income                   $19,760

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:

a.            The company is divided into two sales territories—Northern and Southern. The Northern territory recorded $412,000 in sales and $196,800 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern territory. Fixed expenses of $151,000 and $121,000 are traceable to the Northern and Southern territories, respectively. The rest of the fixed expenses are common to the two territories.

b.            The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $106,000 and $306,000, respectively, in the Northern territory during June. Variable expenses are 24% of the selling price for Paks and 56% for Tibs. Cost records show that $55,000 of the Northern territory\'s fixed expenses is traceable to Paks and $51,000 to Tibs, with the remainder common to the two products.

Requirements:

1.            Prepare contribution format segmented income statements.

2.            Based on the above income statements, which of the following the statement(s) is true?

A.            The high traceable fixed expenses of the Paks product may simply mean that the Paks product is not highly leveraged.

B.            The Northern territory has high traceable fixed expenses.

C.            An increase in sales of Paks product line would not greatly enhance profits in the Northern territory.

D.            Compared to the Southern territory, the Northern territory has a low contribution margin ratio.

E.            The Northern territory has a poor sales mix.

F.            Overall, compared to the Southern territory, the Northern territory is very weak.

ATTACHMENTS
question-2.xlsx