Rizarde, Jonalyn May B.

MANAGERIAL ACCOUNTING
BSBA-FM 2ND YR. SET C T/F
(6:30- 9:30 PM

Sterling Company, A wholesale distributor of DVDs, has been experiencing losses for some
time, as shown by its most recent monthly income statement below:
Sales P1,500,000.00
less: variable expenses 588,000.00
Contribution Margin 912,000.00
Less: fixed expenses 945,000.00
Net Operating loss (33,000.00)

In an effort to isolate the problem, the president has asked for an income statement segmented by
geographic market. Accordingly, the Accounting department has developed the following data :
Geographic Market
East Central
West
Sales P400,000 P600,000
P500,000
Variable expenses as a percentage of sales 52% 30%
40% Traceable fixed expenses P240,000 P330,000
P200,000

Required : 1.Prepare an income statement segmented by geographic market, as desired by the

president. Show both amount and percent columns for the company as a whole and for each
geographic market.
 Requirement 1 Geographic Market
Total % East % Central % West %
company Amount Amount Amount
amount
Sales P1,500,00 10.00 P 100 P600,00 100 P500,000 100
400,000
Less Variable 588,000 39.2 208,000 52 180,00 30 200,000 40
expenses
Contribution margin 912,000 60.8 192,000 48 420,000 70 300,000 60
Less traceable fixed 770,000 51.3 240,000 60 330,000 55 200,000 40
expense
Geographic market 142,000 9.5 (48,000) (12) 90,000 15 100,000 20
segment margin
Less common fixed 175,000 11,7
expenses not
traceable to
geographic markets*
Net operating income (33,000) (2.2)
(loss)

* P945,000 – P770,000 = P175,000.

2. The company’s sales manager believes that sales in Central geographic market could be
increased by 15% if advertising were increased by P25,000 each month. Would you recommend
the increased advertising ?

Requirement 2
Incremental sales (P600,000 × 15%) P90,000
Contribution margin ratio ×70%
Incremental contribution margin 63,000
Less incremental advertising expense 25,000
Incremental net operating income P38,000

Yes, the advertising program should be initiated because the net operating income became higher
not unlike the first required that became less.