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# Segmented income statement-Friends Association is a consulting

## Segmented income statement-Friends Association is a consulting

Segmented income statement exerciseExercise 1Friends Association is a consulting firm that specializes in information systems for constructionand landscaping companies. The firm has two offices-one in Houston and one in Dallas. The firmclassifies the direct costs of consulting jobs as variable costs. A Segmented income statement forthe companyâs most recent year is given below:SalesLess: Variable expensesContribution marginLess: traceable fixedexpensesOffice segment marginLess: common fixedexpensesNet operating incomeTotal\$750,000%100%Houston\$150,000Dallas\$600,00045,000105,00078,000%100%307052360,000240,00090,000%100%604015405,000345,000168,000544622.4177,000120,00023.616\$27,00018150,00025\$57,0007.6%Required:1. By how much would the companyâs net operating income increase if d Dallas increasedits sales by \$75,000 per year? (assume no change in cost behavior patterns)2. Refer to original data. Assume that sales in Houston increase by \$50,000 next year andsales in Dallas remain unchanged. (Assume no change in fixed cost).a. Prepare a new segmented income statement for the company using the format above.b. Observe from the income statement you have prepared that the CM ratio for Houstonhas remained unchanged at 70%, but the segment margin ratio has changed. How doyou explain the change in segment margin ratio?Prof. Dr. EltemsahiPage 1Exercise 2Refer to Exercise 1; assume that Dallasâs sales by major market are as follows:Dallas%Sales\$600,000100%Construction Clients\$400,000%Less: Variable expensesContribution marginLess: traceable fixedexpensesMarket segment marginLess: common fixedexpensesoffice segment margin360,000240,00072,000604012260,000140,00020,000100%65355168,00018,000283\$120,00030%\$150,000Landscaping Clients\$200,000%25%100,000100,00052,000100%505026\$48,00024%The company would like to initiate an intensive advertising campaign in one of the two marketsduring the next month. The campaign would cost \$8,000. Marketing studies indicate that such acampaign would increase sales in Construction market by \$70,000 or increase sales in theLandscaping market by \$60,000.Required:1. In which of the markets would you recommend that the company focus its advertisingcampaign?2. Refer to Exercise 1; Dallas shows \$90,000 in traceable fixed expenses. What happened tothe \$90,000 in this exercise?Prof. Dr. EltemsahiPage 2

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