Product Wise Profitability Segmented Income Statement(For the year ended 31,march 2011) TOYS GARMENTS SWEETS TOTAL

Sales

1,28,000 960,000

3,600,000 2,160,000

2,400,000 1,680,000

7,280,000 4,800,000

Variable cost Contribution Fixed mfg. cost depreciation S&A 3,20,000 1,00,000 1,28,000 1,20,000 1,440,000 2,25,000 1,44,000 1,40,000 7,20,000 1,75,000 1,28,000 80,000 8,20,000* 2,480,000 5,00,000 4,00,000 2,06,000

Total Operating income

(28,000)

9,31,000

3,37,000

(820,000)

4,20,000

PREPARATION OF INCOME STATEMENTS BOTH ON PROUCTS AND AREA BASIS

Total Toys 80,000

Mumbai 40% 40% 20%

Delhi 10% 40% 20%

Calcutta 50% 20% 60%

Garments 90,000 Sweets Total 80,000 25,0000

Other Information
TOYS GARMENTS SWEETS PRICE PER UNIT 16 40 30 VARIABLE COST 12 24 21

On the basis of distribution to Areas

Fixed mfg overheads Depreciation S&G expenses 5,00,000 4,00,000 1,60,000 Variable cost Units produced Direct traceable + Sales

Sales in units Toys Garments Sweets Total Revenues Toys Garments Sweets TOTAL

Mumbai 32,000 36,000 16,000 84,000 Mumbai 3,12,000 1,440,000 4,80,000 2,432,000

Delhi 8,000 36,000 16,000 60,000 Delhi 128,000 1,440,000 480,000 2048,000

Calcutta 40,000 18,000 48,000 106,000 Calcutta 640,000 720,000 1,440,000 2,800,000

Total 80,000 90,000 80,000 250,000 TOTAL 1,280,000 3,600,000 24,00,000 7,280,000

Variable cost Toys Garments Sweets Total Contibution margin

584,000 864,000 336,000 1,584,000 848000

96,000 864,000 336,000 1,296,000 752,000

480,000 432,000 1,008,000 19,20,000 880,000

960,000 2,160,000 1,680,000 4,800,000 24,80,000

AREAS WISE CONTRIBUTION TOYS MUMBAI DELHI CALCUTTA TOTAL 1,28,000 32,000 16,0,000 3,20,000 GARMENTS 576,000 576,000 288,000 1,440,000 SWEETS 144,000 144,000 432,000 7,20,000 TOTAL 848,000 752,000 880,000 2480,000

AREA WISE OPERATING PROFIT TOYS MUMBAI DELHI CALCUTTA TOTAL (52,667) (16,259) (107,187) (176,112) GARMENTS 255,775 220,989 81,365 558,128 SWEETS 28,525 16,930 (7470) 37,984 TOTAL 231,633 221,659 (33,292) 420,000

Problem Found

There was un-allocated expenses of Rs.820,000.

Fixed manufacturing overhead costs should be allocated to both product and regions on the basis of percentage of the variable costs to total variable costs. In case of depreciation, units produced may be treated as cost driver. S&A Expenses may be applied to regions if these could be traced directly and the rest on the basis of total sales or production as the case maybe.

COMMENTS ON THE PERFORMANCE

The contribution margin by all product is in positive. However, contribution by Toys making unit was rather low and may turn into losses when a part of the fixed costs (Rs.2,060,000) is allocated to this unit. At this point, the management should investigate:

The possibility of increase prices of toy products or possibility of increase volume even if the prices have to be reduced. This would, in turn, depend upon the elasticity of demand for such products. ( If elasticity is low, reducing price would not increase quantity and overall operation would be rendered unprofitable.)

When a cross-tab of profitability is studied, it is observed that toys have done miserably in all respect. Of the areas, Peshawar has been in the red for two out of the three products. The management should investigate:

Cutting variable costs in toys by re-engineering and changes in the layout. (Variable cost cannot be reduced, without change in technology, except where there is some undue wastage. Variable Cost is a formula cost and its reduction may bring about a deterioration of quality.) The management may discontinue the manufacture of toys and concentrate on other product lines that are profitable. However, closing toy-making unit would not wipe out the loss of Rs.176,112 as it is after absorbing a portion of fixed overheads (24% of total or Rs.496,112). It may also be looked into if adopting Activity Based Cost would show better result in case of toys unit. In traditional accounts, the distribution of overhead is based on volume or value and may not present a true picture. ABC changes all resources used into activities performed and allocate costs on the basis of activities or benefits taken.