Question

Freeze, Inc., sells air conditioners. The company has two sales territories, Northern and Southern. Two products are sold in each territory: Economy and Efficiency.
During January, the following data are reported for the Northern territory:


Common fixed costs in the Northern territory amount to $125,000 during the month.
During January, the Southern territory reports total sales of $800,000, variable costs of $352,000, and a responsibility margin of $158,000. Freeze also incurs $140,000 of common fixed costs that are not traceable to either sales territory.
In addition to being profit centers, each territory is also evaluated as an investment center. Average assets utilized by the Northern and Southern territories amount to $16,000,000 and $10,000,000, respectively.

Instructions
a. Prepare the January income statement for the Northern territory by product line. Include columns showing percentages as well as dollar amounts.
b. Prepare the January income statement for the company showing profits by sales territories. Conclude your statement with income from operations for the company and with responsibility margins for the two territories. Show percentages as well as dollar amounts.
c. Compute the rate of return on average assets earned in each sales territory during the month of January.
d. In part a, your income statement for the Northern territory included $125,000 in common fixed costs. What happened to these common fixed costs in the responsibility income statement shown in part b ?

e. The manager of the Northern territory is authorized to spend an additional $40,000 per month to advertise one of the two products. On the basis of past experience, the manager estimates that additional advertising will increase the sales of either product by $100,000. On which product should the manager focus this advertising campaign? Explain.
f. Top management is considering investing several million dollars to expand operations in one of its two sales territories. The expansion would increase the traceable fixed costs to the expanded territory in proportion to its increase in sales. Which territory would be the best candidate for this investment?Explain.


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  • CreatedApril 17, 2014
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