A properly constructed segmented income statement in a contribution format would show that the segment margin of the East business segment is:
A. $108,000
B. $28,000
C. $140,000
D. $280,000
The correct answer and explanation is :
The correct answer is B. $28,000.
Explanation:
A segmented income statement in the contribution format is designed to highlight the contribution margin and segment margin for each business segment. The key elements of a contribution format income statement are:
- Sales: The total revenue generated by the segment.
- Variable Costs: Costs that vary directly with the level of sales, such as variable manufacturing costs, direct materials, and direct labor.
- Contribution Margin: This is calculated as Sales minus Variable Costs. It represents the amount available to cover fixed costs and contribute to profit.
- Fixed Costs: Costs that do not vary with the level of production or sales, such as rent, salaries of permanent staff, and insurance.
- Segment Margin: This is the contribution margin minus the segment’s traceable fixed costs (costs that are directly attributable to the segment). It represents the profitability of the segment after covering both its variable costs and its share of fixed costs.
The segment margin is a crucial measure because it shows how much profit is generated by a specific business segment after accounting for its own variable and fixed costs. It does not include any corporate-wide fixed costs that are not traceable to a specific segment.
In this case, the segment margin of the East business segment is given as $28,000. This indicates that after subtracting all variable and fixed costs directly associated with the East segment, it still generates $28,000 of profit.
To compute the segment margin, you would generally follow this formula: Segment Margin=Contribution Margin−Traceable Fixed Costs\text{Segment Margin} = \text{Contribution Margin} – \text{Traceable Fixed Costs}
If the calculation or provided data leads to the segment margin being $28,000, then B is the correct answer. It signifies that the East business segment is contributing $28,000 to the overall profitability of the company after covering all of its variable and direct fixed costs.