Question

Muscle Bound Co. sells home exercise equipment. The company has two sales territories, Eastern and Western. Two products are sold in each territory: FasTrak (a Nordic ski simulator) and RowMaster (a stationary rowing machine).
During January, the following data are reported for the Eastern territory:


Common fixed costs in the Eastern territory amounted to $120,000 during the month.
During January, the Western territory reported total sales of $600,000, variable costs of $270,000, and a responsibility margin of $200,000. Muscle Bound also incurred$180,000 of common fixed costs that were 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 Eastern and Western territories amount to $14,000,000 and $12,000,000, respectively.

Instructions
a. Prepare the January income statement for the Eastern 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 Eastern territory included $120,000 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 Eastern territory is authorized to spend an additional $50,000 per month to advertise one of the products. On the basis of past experience, the manager estimates that additional advertising will increase the sales of either product by $120,000. 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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