Chapter 22, Problem 4AP

a.

To determine

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

Explanation of Solution

Prepare the January income statement for the Eastern Territory by product lineas follows:

Company M
Responsibility Income Statement
Eastern Territory
For January
	Eastern Territory		FasTrak		RowMaster
	Dollars	Percent	Dollars	Percent	Dollars	Percent
Sales	$1,350,000	100.0	$600,000	100.0	$750,000	100.0
Variable costs	720,000	53.0	270,000	45.0	450,000	60.0
Contribution margin	$630,000	47.0	$330,000	55.0	$300,000	40.0
Fixed costs traceable to product lines	230,000	17.0	80,000	13.0	150,000	20.0
Product responsibility margin	$400,000	30.0	$250,000	42.0%	$150,000	20.0%
Common fixed costs	120,000	9
Operating Income	$280,000	21.0%

Table (1)

b.

To determine

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

Explanation of Solution

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

Company M
Responsibility Income Statement
For January
	Entire Company		Eastern Territory		Western Territory
	Dollars	Percent	Dollars	Percent	Dollars	Percent
Sales	$1,950,000	100.0	$1,350,000	100.0	$600,000	100.0
Variable costs	990,000	50.8	720,000	53.0	270,000	45.0
Contribution margin	$960,000	49.2	$630,000	47.0	$330,000	55.0
Fixed costs traceable to territories	480,000	24.6	350,000	26.0	130,000	21.7
Division responsibility margin	$480,000	24.6	$280,000	21.0%	$200,000	33.3%
Common fixed costs	180,000	9.2
Operating Income	$300,000	15.4%

Table (2)

Calculate the fixed costs traceable to Eastern territory:

$\begin{array}{c}\left(\begin{array}{l}\text{Fixed costs traceable }\\ \text{to Eastern territory}\end{array}\right)=\left(\begin{array}{l}\text{Common fixed costs of Eastern territory+}\\ \text{Traceable fixed costs}\end{array}\right)\\ =\$120,000+\$230,000\\ =\$350,000\end{array}$

c.

To determine

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

Explanation of Solution

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

	Eastern Territory	Western Territory
Each territory’s return on assets:
Responsibility margin	$280,000	$200,000
Divide: Average assets	14,000,000	12,000,000
Return on Assets	2.0%	1.7%

Table (3)

d.

To determine

Explain about the amount of $120,000 of fixed costs that were included in the Income statement for Eastern territory in Part b.

Explanation of Solution

Explain about the amount of $120,000 of fixed costs that were included in the Income statement for Eastern territory in Part bas follows:

At some level of the organization, all costs are traceable. The common fixed costs of $120,000 were not traceable to product lines within the Eastern territory, but they are traceable to the territory itself. Hence, the common fixed costs of $120,000 are combined with the other fixed costs of the Eastern 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.

Explanation of Solution

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

	FasTrak	RowMaster
Incremental revenue	$120,000	$120,000
Less: Incremental variable costs (45%, 60%)	54,000	72,000
Incremental increase in contribution margin (55%, 40%)	$66,000	$48,000
Less: Incremental fixed costs	50,000	50,000
Increase (decrease) in responsibility margin	$16,000	$(2,000)

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 FasTrak.

f.

To determine

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

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, Eastern territory, which offers higher return on assets of 2% per month when compared to Western territory which offers return on assets of 1.7% per month, appears to offer the higher potential return on investment.