Problem 1 (Working with a Segmented Income Statement)

Purple Associates
Income Statement by Segments

Total Company
Sales ₱ 750,000
Less: Variable Expenses 405,000
Contribution Margin ₱ 345,000
Less: Traceable fixed expenses 168,000
Office segment margin ₱ 177,000
Less: Common fixed expenses not traceable to segments 120,000
Net Operating Income ₱ 57,000

Required 1. Using Incremental Method

Increase in sales of Cebu ₱ 75,000

Multiply by: Contribution Margin ratio 40%
Increase in Net Operating Income ₱ 30,000

Checking (Detailed Computation/Total Method):

Total Company
Sales ₱ 825,000
Less: Variable Expenses 450,000
Contribution Margin ₱ 375,000
Less: Traceable fixed expenses 168,000
Office segment margin ₱ 207,000
Less: Common fixed expenses not traceable to segments 120,000
Net Operating Income ₱ 87,000
Increase in Net Operating Income (87,000-57,000 ) ₱ 30,000

Required 2. (a)
Purple Associates
Income Statement by Segments

Total Company
Sales ₱ 800,000
Less: Variable Expenses 420,000
Contribution Margin ₱ 380,000
Less: Traceable fixed expenses 168,000
Office segment margin ₱ 212,000
Less: Common fixed expenses not traceable to segments 120,000
Net Operating Income ₱ 92,000

Increase in Net Operating Income (92,000 - 57,000) ₱ 35,000

Required 2 (b)
The contribution margin ratio remain unchanged at a rate of 70% because the
indication of a change in variable cost per unit and selling price per unit. Hen
or production increases, the total variable costs also increases. Meanwhile, th
does not change in total so this results to a lower ratio as sales increases. In re
segment margin gains a higher ratio.
 sociates
nt by Segments

Segment
tal Company Manila Cebu
100% ₱ 150,000 100% ₱ 600,000 100%
54% 45,000 30% 360,000 60%
46% ₱ 105,000 70% ₱ 240,000 40%
22.40% 78,000 52% 90,000 15%
23.60% ₱ 27,000 18% ₱ 150,000 25%
16%
7.60%

Segment
tal Company Manila Cebu
100% ₱ 150,000 100% ₱ 675,000 100%
55% 45,000 30% 405,000 60%
45% ₱ 105,000 70% ₱ 270,000 40%
20.36% 78,000 52% 90,000 13%
25.09% ₱ 27,000 18% ₱ 180,000 27%
15%
10.55%
 sociates
nt by Segments

Segment
tal Company Manila Cebu
100% ₱ 200,000 100% ₱ 600,000 100%
52.50% 60,000 30% 360,000 60%
47.50% ₱ 140,000 70% ₱ 240,000 40%
21% 78,000 39% 90,000 15%
26.50% ₱ 62,000 31% ₱ 150,000 25%
15%
11.50%

0% because there are no

ce per unit. Hence, as the sales
. Meanwhile, the fixed expenses
s increases. In result, the office
Problem 2 (Segmented Income Statement)

Sterling Comp
Income Statement by

Required 1.

Sales
Less: Variable Expenses
Contribution Margin
Less: Traceable Fixed Expenses
Geographic Market Segment Margin
Less: Common Fixed Expenses not traceable to Geographic Markets*
Net Operating Income (Loss)

*945,000 - 770,000 = 175,000

Required 2. Using Incremental Method

Increase in Sales of Centralbbb (600,000 x 15%)

Multiply by: Contribution Margin Ratio
Increase in Contribution Margin
Less: Increase in Advertising Expenses
Increase in Net Operating Income

Checking (Detailed Computation/Total Method):

Sales
Less: Variable Expenses
Contribution Margin
Less: Traceable Fixed Expenses
Geographic Market Segment Margin
Less: Common Fixed Expenses not traceable to Geographic Markets*
Net Operating Income (Loss)

Answer:
Yes, I would recommend the increased advertising. This is because it has incu
amount of income (₱38,000) which turned the net operating loss into an incom
the benefit derived from such decision would benefit the company.
 Sterling Company
Income Statement by Segments

Geographic Market
Total Company East Central
₱ 1,500,000 100% ₱ 400,000 100% ₱ 600,000 100%
588,000 39.2% 208,000 52% 180,000 30%
₱ 912,000 60.8% ₱ 192,000 48% ₱ 420,000 70%
770,000 51.3% 240,000 60% 330,000 55%
₱ 142,000 9.5% -₱ 48,000 -12% ₱ 90,000 15%
175,000 11.7%
-₱ 33,000 -2.2%

₱ 90,000
70%
₱ 63,000
25,000
₱ 38,000

Geographic Market
Total Company East Central
₱ 1,590,000 100% ₱ 400,000 100% ₱ 690,000 100%
615,000 38.7% 208,000 52% 207,000 30%
₱ 975,000 61.3% ₱ 192,000 48% ₱ 483,000 70%
 795,000 50.0% 240,000 60% 355,000 51.4%
₱ 180,000 11.3% -₱ 48,000 -12% ₱ 128,000 18.6%
175,000 11.0%
₱ 5,000 0.3%

because it has incurred a huge

g loss into an income. Therefore,
ompany.
Market
West
₱ 500,000 100%
200,000 40%
₱ 300,000 60%
200,000 40%
₱ 100,000 20%

Market
West
₱ 500,000 100%
200,000 40%
₱ 300,000 60%
 200,000 40%
₱ 100,000 20%