(Solution) Chapter 11 Concept Overview Videos

Question 1

We learn how to prepare segmented income statements. We differentiate between traceable fixed costs and common fixed costs. Segmented income statements provide information for evaluating the profitability and performance of divisions, product lines, sales territories, and other segments of a company. The segment margin consists of revenues, less variable expenses, less traceable fixed expenses of the segment. We also discuss some common mistakes encountered in preparing the segmented income statements.

Knowledge Check 01

Which of the following statements about the segment margin is not true?multiple choice 2

In preparing a segmented income statement, the variable expenses are deducted from sales to yield the contribution margin for each segment.
The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment’s contribution margin.
The segment margin represents the margin available after a segment has covered all of its own costs.
The segment margin is the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment.

Explanation:

The segment margin is obtained by deducting the traceable fixed costs of a segment from the segment’s contribution margin.

Question 2

Knowledge Check 01

Max, Inc., has two divisions, South Division and North Division. South Division’s sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000, respectively. What is the segment margin for the South Division?multiple choice 1

$100,000
$200,000
$300,000
$400,000

Knowledge Check 01 Answer Explanation

Contribution margin = Sales of $500,000 × 60% contribution margin = $300,000

Segment margin = Contribution margin of $300,000 – Traceable fixed expenses of $100,000 = $200,000

Knowledge Check 02

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company’s common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. Assuming the traceable fixed costs of the television division are $300,000, what is the segment margin of the mobile phone division?multiple choice 2

$100,000
$200,000
$300,000
$400,000

Knowledge Check 02 Answer Explanation

Traceable fixed costs of the mobile phone division = Total traceable fixed costs of $500,000 – Traceable fixed costs of the television division of $300,000 = $200,000.

Mobile phone segment margin = Contribution margin of $600,000 – Traceable fixed costs of $200,000 = $400,000.

Question 3

We learn how to compute company wide and segment break-even points. We know that traceable fixed costs belong to segments, and they are included in segment break-even calculations. We know that common fixed costs are not included in segment break-even calculations, but are included in company wide break-even calculations.

Knowledge Check 01

Which of the following is a common mistake made by companies when assigning costs to segments?multiple choice

They use allocation bases that drive the costs when assigning costs to segments.
They trace fixed expenses to segments when it is feasible to do so.
They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.
They include “upstream” and “downstream” costs when preparing profitability analyses that relate to individual product costs.

Explanation

Assigning common costs, such as the cost of the corporate headquarters buildings to segments is inherently arbitrary. It overstates the amount of cost that would disappear if any given segment were discontinued.