Question:

The most current monthly contribution format income statement for Reston Company is provided below:

Income Statement

For the Month Ended May 31

Sales......................................$900,000 100%

Variable Expenses............408,000 45.3

Contribution margin........ 492,000 54.7

Fixed expenses...................465,000 51.7

Net operating income.......$27,000 3.0%

Management is disappointed with the company's performance and is wondering what will be done to improve profits. By examining cost and sales records, you have determined the subsequent:

a. The company is divided into two sales territories--- Eastern and Central. The Central Territory recorded $400,000 in sales and $208,000 in variable expenses during May. The remaining variable and sales expenses were recorded in the Eastern Territory. Fixed expenses of $160, and $$130,000 are traceable to the Central and Eastern Territories, correspondingly. The rest of the fixed expenses are common to the two territories.

b. The company is the exclusive distributor for two products --- Pows and Awls. Sales of Awls and Pows totaled$100,000 and $300,000, correspondingly, in the Central Territory during May. Variable expenses are 25% of the selling price for Awls and 61% for Pows. Cost records indicates that $60,000 of the Central Territory's fixed expenses are traceable to Awls and $54,000 to Pows, with the remainder common to the two products

Required:

1. Prepare contribution format segment income statements, first indicating the total company broken down between sales territories and then indicating the Central Territory broken down by product line. In addition, for the company as a whole and for each segment, show every item on the segmented income statements as a percent of sales.

2. Look at the statement you have prepared indicating the total company segmented by sales territory. What points revealed by this statement could be brought to management's attention?

3. Look at the statement you have prepared viewing the Central Territory segmented by product lines. What points revealed by this statement could be brought to management's attention?