Question

2. Lereve Company has recorded the following information about the results of its operations for the fourth quarter: Sales revenues Variable cost of sales Fixed costs: Common Traceable Total Company $200,000 $ 60,000 $100,000 $ 50,000 Western Division $ 80,000 30,000 25,000 20,000 Eastern Division $120,000 30,000 75,000 30,000 Based on this information, prepare a segmented income statement for the quarter and comment on the results.

Answer 1

Lereve Company

Segmented Income Statement for the fourth quarter:

Total Company Western Division Eastern Division

Sales revenues $200,000 $80,000 $120,000

Variable cost of sales 60,000 30,000 30,000

Contribution $140,000 $50,000 $90,000

Fixed costs:

Common $100,000 $25,000 $75,000

Traceable 50,000 20,000 30,000

Net Income (Loss) ($10,000) $5,000 ($15,000)

The results show that the Eastern Division made a net loss of $15,000 and the Western Division raked in a net income of $5,000, which resulted in the company-wide net loss of $10,000. This loss could be traced to the allocated common fixed costs of the division, because its contribution to fixed costs was substantial and better than the Western Division's.

Step-by-step explanation:

When the results of the operations of a divisional company like Lereve Company are prepared in segmental form, the performance pictures become clearer. Management is enabled to focus on the segments or the factors that are generating the loss to the company. Perhaps, as in this case, the problem may not be with the division, but the allocation of fixed costs to the divisions. It can still be traced to the company as a whole, since it is generating much more fixed costs than it could afford from its revenue.