compute the profit margin before income taxes for divisions b and c and for the othe 563119

Income Statement and Segment Reporting Frahm Corporation presents the following account balances, after adjustments, on December 31, 2007:

Administrative and office salaries

$43,000

Sales salaries and commissions

$59,000

Interest expense

8,800

Property taxes

7,000

Bad debts expense

6,000

Depreciation expense: buildings, sales equipment, and office equipment

31,000

Sales (net)

600,000

Cost of goods sold

323,700

Loss due to tornado (pretax)

12,000

Delivery expense

25,000

Advertising expense

40,000

Interest revenue

3,000

Miscellaneous office expenses

2,300

The following information is also available:

1. The income tax rate on all items is 30%.

2. 10,000 shares of common stock have been outstanding the entire year.

3. Frahm Corporation operates several divisions, two of which, Divisions B and C, are considered reportable operating segments.

4. Sales (net) are made as follows: Division B, 60%; Division C, 25%; other divisions, 15% of the total. No intersegment sales are made.

5. The cost of goods sold as a percentage of net sales in each division is as follows: Division B, 55%; Division C, 52%; other divisions, 53%.

6. Operating expenses are traceable to divisions as follows:

a. Sales salaries directly traceable to Division B total $27,000; Division C, $12,000; other divisions, $8,000.

b. Sales commissions in each division are 2% of net sales.

c. Bad debts average 1% of net sales in each division.

d. Of the total delivery expense, 64% was spent in Division B, 20% was spent in Division C, and 16% was spent in the other divisions.

e. Of the total advertising expense, $5,000 was spent on general advertising. Of the remainder, 52% was spent in Division B, 28% in Division C, and 20% in the other divisions.

f. Administrative and office salaries are considered general corporate expenses, except for $17,000 allocated for the management of Division B, $12,000 for the management of Division C, and $10,000 for the management of the other divisions.

g. Property taxes paid are $4,000 in Division B, $2,000 in Division C, and $1,000 in other divisions.

h. Miscellaneous office expenses are not directly traced to divisions.

7. The depreciation expense is listed as a separate component on the corporate income statement. Of the total listed, $6,000 is due to depreciation on the corporate headquarters building and is not allocated. Of the remainder, $15,000 is traceable to Division B, $6,000 is traceable to Division C, and $4,000 is traceable to the other divisions.

8. Interest expense is for corporate bonds used to finance overall operating activities. Interest revenue is from corporate investments in marketable securities.

9. An infrequent and unusual tornado caused a warehouse used in Division B to be severely damaged, resulting in the material pretax loss shown earlier.

10. Of the $1,600,000 total company assets at year end, $910,000 are assets of Division B, $420,000 are assets of Division C, $140,000 are assets of the remaining divisions, and $130,000 are assets related to corporate headquarters.

11. Capital expenditures of Divisions B and C amounted to $50,000 and $27,000, respectively, in 2007 and are included in the total company assets at year end.

Required

1. Prepare a single step 2007 income statement for the Frahm Corporation.

2. Prepare a separate schedule that shows the revenues, profit, and assets of Divisions B and C and the remaining operating divisions.

3. Prepare appropriate segment notes relating to depreciation, profits, and capital expenditures.

4. Compute the profit margin before income taxes for Divisions B and C, and for the other divisions. What do these ratios reveal?

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