PROBLEMS IN SEGMENT REPORTING
Problem 1: A company has three segments: Electronics, Clothing, and Home Goods. The
revenues are:
Electronics: P250,000 (external), P50,000 (inter-segment)
Clothing: P200,000 (external), P30,000 (inter-segment)
Home Goods: P150,000 (external), P20,000 (inter-segment)
Required:
a) Calculate the total revenue (including inter-segment) for each segment.
b) Calculate the total consolidated revenue (excluding inter-segment).
Problem 2: A company has the following segments information ( in millions):
Segment Revenue Profit/ Loss Assets
Alpha 150 15 400
Beta 120 10 300
Charlie 50 (2) 100
Delta 20 3 50
Echo 10 2 25
Total consolidated figures:
Revenue: P350 million
Absolute Profit/Loss: P30 million
Total Assets: P875 million
Question: Based on the quantitative thresholds under IFRS 8, which segments are reportable?
10 percent rule.
Problem 3: The business staff of the law firm Frampton, Davis & Smythe has constructed the
following report that breaks down the firm’s overall results for last month into two business
segments—family law and commercial law: (in pesos)
Firm Total Commercial Family Law
Law
Revenues from clients 1,000,000 600,000 400,000
Variable cost and expenses 220,000 120,000 100,000
Contribution margin 780,000 480,000 300,000
Traceable fixed costs 670,000 390,000 280,000
Segment margin 110,000 90,000 20,000
Common fixed expenses 60,000 36,000 24,000
EBIT 50,000 54,000 (4,000)
However, this report is not quite correct. The common fixed expenses such as the managing
partner’s salary, general administrative expenses, and general firm advertising have been
allocated to the two segments based on revenues from clients.
Questions:
A. Redo the segment report, eliminating the allocation of common fixed expenses. Would the
firm be better off financially if the family law segment were dropped? (Note: Many of the
firm’s commercial law clients also use the firm for their family law requirements such as
drawing up wills.)
B. The firm’s advertising agency has proposed an ad campaign targeted at boosting the
revenues of the family law segment. The ad campaign would cost P20,000, and the
advertising agency claims it would increase family law revenues by P100,000. The
managing partner of Frampton, Davis & Smythe, believes this increase in business could be
accommodated without any increase in fixed expenses. Estimate the effect this ad campaign
would have on the family law segment margin and on the firm’s overall net operating
income.
C. Compute the companywide break-even point in dollar sales and the dollar sales required for
each business segment to break even.
PROBLEMS IN FINANCIAL MEASURES
Problem 1: The Magnetic Imaging Division of Medical Diagnostics, Inc., has reported the
following results for last year’s operations: Sales P25 million; Net operating income P3 million;
Average operating assets P10 million.
Questions:
A. Compute the Magnetic Imaging Division’s margin, turnover, and ROI.
B. Top management of Medical Diagnostics, Inc., has set a minimum required rate of return on
average operating assets of 25%. What is the Magnetic Imaging Division’s residual income for
the year?
Problem 2: Alyeska Services Company, a division of a major oil company, provides various
services to the operators of the North Slope oil field in Alaska. Data concerning the most recent
year:
Sales P 7,500,000; Net operating income P600,000; Average operating assets P 5,000,000
Questions:
A. Compute the margin for Alyeska Services Company.
B. Compute the turnover for Alyeska Services Company.
C. Compute the return on investment (ROI) for Alyeska Services Company.
D. Top management of Alyeska Services Company has set a minimum required rate of return
on average operating assets of 10%. What is the Magnetic Imaging Division’s residual
income for the year?
Problem 3: Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are
given below:
North South
Sales P4,000,000 P7,000,000
Average operating assets 2,000,000 2,000,000
Net operating income 360,000 420,000
Questions:
A. Compute the rate of return for each division using the return on investment (ROI) formula
stated in terms of margin and turnover.
B. Which divisional manager seems to be doing the better job? Why