Chapter 22, Problem 4BP

a.

To determine

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

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 Territory		Economy		Efficiency
	Dollars	Percent	Dollars	Percent	Dollars	Percent
Sales	$1,500,000	100.0	$500,000	100.0	$1,000,000	100.0
Variable costs	850,000	56.7	150,000	30.0	700,000	70.0
Contribution margin	$650,000	43.3	$350,000	70.0	$300,000	30.0
Fixed costs traceable to product lines	290,000	19.3	90,000	18.0	200,000	20.0
Division responsibility margin	$360,000	24.0	$260,000	52.0%	$100,000	10.0%
Common fixed costs	125,000	8.3
Operating Income	$235,000	15.7%

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:

Incorporation F
Responsibility Income Statement
For January
	Entire Company		Northern Territory		Southern Territory
	Dollars	Percent	Dollars	Percent	Dollars	Percent
Sales	$2,300,000	100.0	$1,500,000	100.0	$800,000	100.0
Variable costs	1,202,000	52.3	850,000	56.7	352,000	44.0
Contribution margin	$1,098,000	47.7	$650,000	43.3	$448,000	56.0
Fixed costs traceable to territories	705,000	30.7	415,000	27.6	290,000	36.0
Division responsibility margin	$393,000	17.1	$235,000	15.7%	$158,000	20.0%
Common fixed costs	140,000	6.1
Operating Income	$253,000	11.0%

Table (2)

Calculate the fixed costs traceable to Northern territory:

$\begin{array}{c}\left(\begin{array}{l}\text{Fixed costs traceable }\\ \text{to Northern territory}\end{array}\right)=\left(\begin{array}{l}\text{Common fixed costs of Northern territory+}\\ \text{Traceable fixed costs}\end{array}\right)\\ =\$125,000+\$290,000\\ =\$415,000\end{array}$

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:

	Northern Territory	Southern Territory
Each territory’s return on assets:
Responsibility margin	$235,000	$158,000
Divide: Average assets	16,000,000	10,000,000
Return on Assets	1.5%	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.

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.

Explanation of Solution

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

	Economy	Efficiency
Incremental revenue	$100,000	$100,000
Less: Incremental variable costs (30%, 70%)	30,000	70,000
Incremental increase in contribution margin (70%, 30%)	$70,000	$30,000
Less: Incremental fixed costs	40,000	40,000
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.

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.