Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 24

Segment Reporting

Leapin’ Larry’s Pre-Owned Cars has two divisions, Operations and Financing. Operations is responsible for selling Larry’s inventory as quickly as possible and purchasing cars for future sale. Financing Division takes loan applications and packages loans into pools and sells them in the financial markets. It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules.

Operations Division had $51 million in sales last year. Costs, other than those charged by Financing Division, totaled $39 million. Financing Division earned revenues of $12 million from servicing loans and incurred outside costs of $10 million. In addition, Financing charged Operations $6 million for loan-related fees. Operations manager complained to Larry that Financing was charging twice the commercial rate for loan-related fees and that Operations would be better off sending its buyers to an outside lender.

Financing’s manager replied that although commercial rates could be lower, servicing Larry’s loans is more difficult, thereby justifying the higher fees.

Required

a. What are the reported segment operating profits for each division, ignoring income taxes and using the $6 million transfer price for the loan-related fees?

---

b. What are the reported segment operating profits for each division, ignoring income taxes and using a $3 million commercial rate as the transfer price for the loan-related fees?

Step 1 of 2

Segment Reporting: Calculation of Segment Profit

A.

It is given that apart from the Operation Division is paying $ 6 million as loan related fees to the division finance. Hence it would be expenditure for the Operation division and Income for the Finance division.

Student should note that this figure is given in the question, hence it is needed to be included in the profit and loss statement of both the divisions. All the other figures are just taken from the question. We have used here a term profit from outside activities just to differentiate the two types of profits.

One profit which the division makes in normal course of business activity and other type of profit element which firm makes while dealing with each other.

Operation Division	Finance Division
SR.NO	Details	Amount	Details	Amount
1	Sales	$ 51 million	Revenue	$12 million
2	Outside Costs	$ 39 million	Outside Costs	$ 10 million
3	Profit from outside activities	$ 12 million	Profit from outside activities	$ 2 million
4	Less ; loan related fees	$ 6 million	Add: loan related fees	$ 6 million
5	Gross profit	$ 6 million	Gross profit	$ 8 million