Segment Reporting Case Study

Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The companys major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacific Rims 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 manufacturing 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 data presented above.

Required:

Prepare a segmented income statement for Pacific Rim Industries based on the companys geographical areas. The statement should show the operating income for each segment.

As a result of the information disclosed by both segmented income statements (by product line and by geographic area), recommend areas where Pacific Rim Industries should focus its attention in order to improve corporate profitability.

\begin{tabular}{|l|r|r|r|r|} \hline \multirow{2}{*}{} & \multicolumn{3}{|c|}{ Product Lines } \\ \cline { 2 - 5 } & Furniture & Sports & Appliances & \multicolumn{1}{|c|}{ Total } \\ \hline Production and sales in units & 160,000 & 180,000 & 160,000 & 500,000 \\ \hline Average selling price per unit & $8.00 & $20.00 & $15.00 & \\ \hline Average variable manufacturing cost per unit & 4.00 & 9.50 & 8.25 & \\ \hline Average variable selling expense per unit & 2.00 & 2.50 & 2.25 & \\ \hline Fixed manufacturing overhead, excluding depreciation & & & & \\ \hline Depreciation of plant and equipment & & 400,000 \\ \hline Administrative and selling expense & & & 1,160,000 \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline \multicolumn{2}{|l|}{ Manufacturing Staff } \\ \hline Furniture & $120,000 \\ \hline Sports & 140,000 \\ \hline Appliances & 80,000 \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline \multicolumn{2}{|l|}{ Sales Staff } \\ \hline United States & $60,000 \\ \hline Canada & 100,000 \\ \hline Asia & 250,000 \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline \multirow{2}{*}{} & \multicolumn{3}{|c|}{ Percentage of Unit Sales } \\ \cline { 2 - 4 } & United States & Canada & Asia \\ \hline Furniture & 40% & 10% & 50% \\ \hline Sports & 40% & 40% & 20% \\ \hline Appliances & 20% & 20% & 60% \\ \hline \end{tabular} PACIFIC RIM INDUSTRIES Segmented Income Statement by Product Lines For the Fiscal Year Ended April 30, 202x