Chapter 18, Problem 51P

1.

To determine

Draft a contribution income statement for F Company.

Explanation of Solution

Prepare a contribution income statement for F Company.

Particulars	Total ($)	Not allocated ($)	London ($)	New York ($)
Net sales	3,500,000		1,400,000	2,100,000
Variable cost
COGS	1,862,000		728,000 (1)	1,134,000
Operating cost	1,092,000		504,000 (4)	588,000
Total variable cost	2,954,000		1,232,000	1,722,000
Contribution margin	546,000		168,000	378,000
Less: Controllable fixed cost (6)	250,000	50,000	100,000	100,000
Controllable margin	296,000		68,000	278,000
Less: Non controllable fixed cost (8)	220,000	22,000	110,000	88,000
Contribution by profit center	76,000	72,000	(42,000)	190,000
Less: Non traceable costs	70,000
Operating income	6,000

Table (1)

Breakdown for the New York store:

Particulars	New York ($)	Not allocated ($)	Men’s Wear ($)	Women’s wear ($)
Net sales (2)	2,100,000		840,000	1,260,000
Variable cost
COGS (3)	1,134,000		378,000	756,000
Variable operating cost (5)	588,000		184,800	403,200
Contribution margin	378,000		277,200	100,800
Controllable fixed cost (7)	100,000	15,000	45,000	40,000
Controllable margin	278,000		232,200	60,800
Non controllable fixed costs (9)	88,000	44,000	30,800	13,200
Contribution by profit center	190,000	59,000	201,400	47,600

Table (2)

Working notes:

1) Calculate the cost of goods sold (London): 

$\begin{array}{c}\text{Cost of goods sold }\left(\text{London}\right)=\left(52\%\text{ of London's sales}\right)\\ =\left(\$1,400,000\times \frac{52}{100}\right)\\ =\$728,000\end{array}$

2) Calculate the sales of Hartford clothing and cycle:

For New York men’s wear sale:

$\begin{array}{c}\text{Sales of New York men's wear}=\left(40\%\text{ of New York sales}\right)\\ =\left(\$2,100,000\times \frac{40}{100}\right)\\ =\$840,000\end{array}$

For New York women’s wear sale:

$\begin{array}{c}\text{Sales of New York women's wear}=\left(60\%\text{ of New York's sale}\right)\\ =\left(\$2,100,000\times \frac{60}{100}\right)\\ =\$1,260,000\end{array}$

3) Calculate the cost of goods sold (New York):

For cost of goods sold of New York men’s wear:

$\begin{array}{c}\left[\begin{array}{l}\text{Cost of goods sold }\\ \left(\text{New York men's wear}\right)\end{array}\right]=\left(\text{45\% of New york men's wear}\right)\\ =\left(\$840,000\times \frac{45}{100}\right)\\ =\$378,000\end{array}$

For cost of goods sold of New York women’s wear:

$\begin{array}{c}\left[\begin{array}{l}\text{Cost of goods sold }\\ \left(\text{New York women's wear}\right)\end{array}\right]=\left(\text{60\% of New York women's wear}\right)\\ =\left(\$1,260,000\times \frac{60}{100}\right)\\ =\$756,000\end{array}$

4) Calculate the variable operating cost of London:

$\begin{array}{c}\text{Operating cost }\left(\text{London}\right)=\left(36\%\text{ of London's sales}\right)\\ =\left(\$1,400,000\times \frac{36}{100}\right)\\ =\$504,000\end{array}$

5) Calculate the operating cost of New York:

For New York men’s wear:

$\begin{array}{c}\left(\begin{array}{l}\text{Operating cost of}\\ \text{ New York men's wear}\end{array}\right)=\left(22\%\text{ of New York men's wear sales}\right)\\ =\left(\$840,000\times \frac{22}{100}\right)\\ =\$184,800\end{array}$

For New York women’s wear:

$\begin{array}{c}\left(\begin{array}{l}\text{Operating cost of}\\ \text{ New York women's wear}\end{array}\right)=\left(35\%\text{ of New York women's wear sales}\right)\\ =\left(\$1,260,000\times 32\%\right)\\ =\$403,200\end{array}$

6) Calculate the fixed controllable cost:

For London:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of London}\end{array}\right)=\left(40\%\text{ of total cost}\right)\\ =\left(\$250,000\times 40\%\right)\\ =\$100,000\end{array}$

For New York:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of New York}\end{array}\right)=\left(40\%\text{ of total cost}\right)\\ =\left(\$250,000\times 40\%\right)\\ =\$100,000\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(20\%\text{ of total cost}\right)\\ =\left(\$250,000\times 20\%\right)\\ =\$50,000\end{array}$

7) Calculate the fixed controllable cost of New York men’s wear and women’s wear:

For New York men’s wear:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of New York men's wear}\end{array}\right)=\left(45\%\text{ of total cost}\right)\\ =\left(\$100,000\times 45\%\right)\\ =\$45,000\end{array}$

For Hartford cycles:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of New York women's wear}\end{array}\right)=\left(40\%\text{ of total cost}\right)\\ =\left(\$100,000\times 40\%\right)\\ =\$40,000\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(15\%\text{ of total cost}\right)\\ =\left(\$100,000\times 15\%\right)\\ =\$15,000\end{array}$

8) Calculate the non-controllable fixed cost:

For London:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of London}\end{array}\right)=\left(50\%\text{ of total cost}\right)\\ =\left(\$220,000\times 50\%\right)\\ =\$110,000\end{array}$

For New York:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of New York}\end{array}\right)=\left(\text{40\% of total cost}\right)\\ =\left(\$220,000\times 40\%\right)\\ =\$88,000\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(10\%\text{ of total cost}\right)\\ =\left(\$220,000\times 10\%\right)\\ =\$22,000\end{array}$

9) Calculate the fixed non-controllable cost of Hartford clothing and cycle:

For New York men’s wear:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of New York men's wear}\end{array}\right)=\left(35\%\text{ of total cost}\right)\\ =\left(\$88,000\times 35\%\right)\\ =\$30,800\end{array}$

For New York women’s wear:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of New York women's wear}\end{array}\right)=\left(15\%\text{ of total cost}\right)\\ =\left(\$88,000\times 15\%\right)\\ =\$13,200\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(\text{50\% of total cost}\right)\\ =\left(\$88,000\times 50\%\right)\\ =\$44,000\end{array}$

2.

To determine

Describe the global issues that are part of evaluation of profit center in Company F.

Explanation of Solution

The global issues that Company F would face are as follows:

• Foreign currency translation as the US dollar fluctuates relatively to the UK pound. It is difficult to determine the currency change but it is important to anticipate a change of income as a result of fluctuations in the currency.
• The state of economies of different countries in which Company F is doing business. The economies of the countries may be either not weaken or strengthen at the same time hence, it will be different for business in different location.