CH06 COMPUTER LAB EXERCISE
BACKGROUND INFORMATION:
1. Frames Corp has two branches (North and South)
2. 2011 financial information for the North is provided as follows
(Sales $100, variable expense $50, fixed expenses that
would go away if the North branch is closed $55)
3. 2011 financial information for the South is provided as follows
(Sales $200, variable expense $160, fixed expenses that
would go away if the South branch is closed $20)
4. In addition, Frames had $10 of 2011 fixed expenses at the
corporate headquarters that would not go away if the
North branch was closed and would not go away if the
South branch was closed.
5. The board of directors is considering closing the business, or
atleast closing one of the branches. They have asked you to
prepare an analysis and give them a recommendation.
REQUIRED:
1. Prepare a segmented contribution format income statement.		Frames Corp
Be sure to include rows for segment contribution margin,		Contribution Format Income Statement by Segment (as originally prepared)
segment traceable fixed expenses, segment margin, and		For year ended 12/31/11
common fixed expenses. Be sure to include columns for			Total $	Total % of sales	North $	North % of sales	South $	South % of sales
Total (company wide) $, Total % of sales, North $, North % of		Sales revenue
sales, South $, and South % of sales.		Variable expenses
		Contribution margin
Based upon your analysis, what recommendation would you		Traceable fixed expenses
make?		Segment margin
		Common fixed expenses
		Net operating income
2. Now assume that you double check all the numbers and		Frames Corp
discover that some errors in gathering the data have been		Contribution Format Income Statement by Segment (as corrected)
made. Specifically, you discover that $25 of the $55 originally		For year ended 12/31/11
thought to be traceable fixed costs for the North branch are			Total $	Total % of sales	North $	North % of sales	South $	South % of sales
actually common fixed costs for the company as a whole (that		Sales revenue
is, costs that will not go away if the North branch is closed, or		Variable expenses
if the South branch is closed. Prepare a corrected statement.		Contribution margin
		Traceable fixed expenses
Based upon your revised analysis, what recemmendation		Segment margin
would you now make?		Common fixed expenses
		Net operating income
3. Now that you have the number right, your board of directors		Frames Corp
has asked you to give them a recommendation on whether		Contribution Format Income Statement by Segment (with new equipment at North branch)
they should lease equipment which will result in additional		For year ended 12/31/11
fixed expense of $10 per year. The equipment can be put			Total $	Total % of sales	North $	North % of sales	South $	South % of sales
either the North branch or the South branch. Gross sales		Sales revenue
revenues are not expected to change regardless of which		Variable expenses
branch gets the equipment. However, the equipment is		Contribution margin
expected to result in 10% decrease in variable expenses		Traceable fixed expenses
at whichever branch gets the equipment.		Segment margin
		Common fixed expenses
Should they buy the equipment? For which branch?		Net operating income
		Frames Corp
		Contribution Format Income Statement by Segment (with new equipment at South branch)
		For year ended 12/31/11
			Total $	Total % of sales	North $	North % of sales	South $	South % of sales
		Sales revenue
		Variable expenses
		Contribution margin
		Traceable fixed expenses
		Segment margin
		Common fixed expenses
		Net operating income