North American Industries is a diversified company whose products are marketed both domestically and internationally. The company's major product lines are furniture, sports equipment, and house hold appliances. At a recent meeting of the board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement.
Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations.
Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings.

1. The division managers concluded that Murphy should allocate fixed production overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.
2. Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.
3. There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.

4. The division managers were able to provide reliable sales percentages for their product lines by geographical area.

Murphy prepared the following product-line income statement based on the preceding data.

1. Prepare a segmented income statement for North American Industries based on the company’s geographical areas. The statement should show the operating income for each segment.
2. As a result of the information disclosed by both segmented income statements (by product line and by geographical area), recommend areas where North American Industries should focus its attention in order to improve corporate profitability.

  • CreatedApril 22, 2014
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