Managerial Accounting 10th Canadian Edition By Garrison – Test Bank

Exercise 11-1 (10 minutes)
Total Shovels Rakes
Sales* $140,000 $35,000 $105,000
Variable expenses** 82,750 22,750 60,000
Contribution margin 57,250 12,250 45,000
Traceable fixed expenses 33,000 8,000 25,000
Product line segment margin 24,250 $ 4,250 $ 20,000
Common fixed expenses not traceable to products 15,000
Operating income $ 9,250

** Shovels: 3,500 × $10.00 per unit = $35,000;
Rakes: 5,000 × $21.00 per unit= $105,000.
Shovels: 3,500 × $6.50 per pack = $22,750;
Rakes: 5,000 × $12.00 per pack= $60,000.

Exercise 11-2 (20 minutes)
1. Total Geographic Market
Company South Central North
Sales $2,000,000 $600,000 $800,000 $600,000
Variable expenses
(52%, 30%, 40%) 792,000 312,000 240,000 240,000
Contribution margin 1,208,000 288,000 560,000 360,000
Traceable fixed expenses 1,150,000 320,000 530,000 300,000
Geographic market seg-ment margin 58,000 $(32,000) $ 30,000 $60,000
Common fixed expenses not traceable to geo-graphic markets* 155,000
Operating income (loss) $ (97,000)

*$1,305,000 – $1,150,000 = $155,000

2. Incremental sales ($800,000 × 15%) $120,000
Contribution margin ratio ($560,000 ÷ $800,000) × 70%
Incremental contribution margin 84,000
Less incremental advertising expense 25,000
Incremental operating income $ 59,000

Yes, the advertising program should be initiated.

Exercise 11-3 (20 minutes)
1. $75,000 × 40% CM ratio = $30,000 increased contribution margin in Vancouver. Since the fixed costs in the office and in the company as a whole will not change, the entire $30,000 would result in increased
operating income for the company.

It is incorrect to multiply the $75,000 increase in sales by Vancouver’s 25% segment margin ratio. This approach assumes that the segment’s traceable fixed expenses increase in proportion to sales, but if they did, they would not be fixed.

2. a. The segmented income statement follows:

Segments
Total Company Toronto Vancouver
Amount % Amount % Amount %
Sales $800,000 100.0 $200,000 100 $600,000 100
Variable
expenses 420,000 52.5 60,000 30 360,000 60
Contribution margin 380,000 47.5 140,000 70 240,000 40
Traceable fixed expenses 168,000 21.0 78,000 39 90,000 15
Office segment
margin 212,000 26.5 $ 62,000 31 $150,000 25
Common fixed expenses not traceable to segments 120,000 15.0
Operating
income $ 92,000 11.5

b. The segment margin ratio rises and falls as sales rise and fall due to the presence of fixed costs. The fixed expenses are spread over a larg-er base as sales increase.

In contrast to the segment ratio, the contribution margin ratio is
stable so long as there is no change in either variable expenses or the selling price of a unit of service.

Exercise 11-4 (15 minutes)
1. The company should focus its campaign on Landscaping Clients. The computations are:
Construction Clients Landscaping Clients
Increased sales $70,000 $60,000
Market CM ratio × 35% × 50%
Incremental contribution margin $24,500 $30,000
Less cost of the campaign 8,000 8,000
Increased segment margin and
operating income for the company
as a whole $16,500 $22,000

2. The $90,000 in traceable fixed expenses in the previous exercise is now partly traceable and partly common. When we segment Vancouver by market, only $72,000 remains a traceable fixed expense. This amount represents costs such as advertising and salaries that arise because of the existence of the construction and landscaping market segments. The re-maining $18,000 ($90,000 – $72,000) is a common cost when Vancou-ver is segmented by market. This amount would include such costs as the salary of the manager of the Vancouver office that could not be avoided by eliminating either of the two market segments.

Exercise 11-5 (10 minutes)

1. A responsibility centre is any part of an organization for which a manager is accountable for performance.
2. A profit centre is a business segment where the manager has control over revenue and cost.
3. An investment centre manager is held responsible for the residual income of the segment.
4. A cost centre is often evaluated using flexible budget variances.
5. Investment centre managers are responsible for initiating investment proposals.