Chapter6

A company has two segments with total sales of $500,000 and total variable costs of $343,750. Traceable fixed expenses are $50,000 and common fixed expenses are $80,000. The break even in dollars for the company as a whole equals $___________.

$416,000

SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______.

$11,000 ($100,000 10% ($60,000 / $100,000)) is $6,000 + $5,000 saved from stopping catalog sales = $11,000

JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expenses of $70,000. Commercial has traceable fixed expenses of $50,000 and a contribution margin ratio of 55%. The company also has $30,000 of common fixed expenses. The break-even point in dollar sales for the Retail segment equals ______.

$175,000 Reason: $70,000 ÷ 40% = $175,000

Advocates of variable costing believe fixed manufacturing costs ______.

*are period expenses *are not caused by and cannot be meaningfully traced to specific units of production

Incorrectly or arbitrarily assigning common costs to segments ______.

*could reduce the overall profits of the company *distorts the profitability of segments *holds managers responsible for costs they cannot control

GAAP and IFRS rules ______.

*create problems in reconciling internal and external reports *require segmented financial data be included in annual reports *require that the same method be used for both internal and external segment reporting

Using absorption costing for segmented income statements can lead to ______.

*under-costing of segments *omission of upstream and downstream costs

Absorption costing is ______.

*used by most companies for both internal and external reports *required by GAAP and IFRS

Advocates of ____ costing believe fixed costs are an essential part of product production. (Enter only one word per blank.)

Absorption

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin.

Segment break-even calculations include ______ fixed expenses.

Traceable

T or F ...A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

T or F... A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

Because nonmanufacturing costs are not included as costs of a product, the use of ________ costing can lead to the omission of segment costs.

absorption

In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States.

absorption

Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of

absorption costing.

An otherwise profitable segment may appear to be unprofitable if_______fixed costs are allocated to it.

common

A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company ______.

has an overall net operating loss of $10,000

The company-wide break-even sales will always be ______ the sum of the segment break-even sales.

higher than

Segmented income statements ______.

may be prepared for activities at many levels in a company

Costs should be allocated to segments for internal decision-making purposes ______ the allocation base actually drives the cost being allocated.

only when

Costs should be allocated to segments for internal decision-making purposes ______.

only when the allocation base actually drives the cost being allocated

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

From a decision making point of view, ___________ margin is most useful for major capacity decisions and ________ margin is most useful for short-term sales volume decisions

segment ; contribution

Costs that can be traced directly to a segment ______.

should not be allocated to other segments

One mistake companies make when preparing segmented income statements is arbitrarily assigning_________

traceable fixed costs

Advocates of ______ costing believe the matching principle dictates that fixed costs should be recognized as an expense in the current period.

variable

Segment contribution margin equals segment revenue minus the ______ expenses for the segment.

variable