Losses have been incurred at Millard Corporation for some time. In an effort to isolate the problem and improve the company’s performance, management has requested that the monthly income statement be segmented by sales region. The company’s first effort at preparing a segmented statement is given below. This statement is for May, the most recent month of activity.

Cost of goods sold and shipping expense are both variable; other costs are all fixed.

Millard Corporation is a wholesale distributor of office products. It purchases office products from manufacturers and distributes them in the three regions given above. The three regions are about the same size, and each has its own manager and sales staff. The products that the company distributes vary widely in profitability.

Required:

1.          List any disadvantages or weaknesses that you see to the statement format illustrated above.

2.         Explain the basis that is apparently being used to allocate the corporate expenses to the regions. Do you agree with these allocations? Explain.

3.         Prepare a new contribution format segmented income statement for May. Show a Total column as well as data for each region. In addition, for the company as a whole and for each sales region, show each item on the segmented income statement as a percent of sales.

4.         Analyze the statement that you prepared in part (3) above. What points that might help to improve the company’s performance would you bring to management’s attention?

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Sales Region West Central East S800,000 $ 750,000 $450,000 Sales Regional expenses (traceable): 280,000 162,900 376,500 Cost of goods sold 108,000 200,000 210,000 Advertising 90,000 88,000 135,000 Salaries 13,500 12,000 15,000 Utilities 27,000 28,000 30,000 Depreciation 17,100 32,000 28,500 Shipping expense 418,500 640,000 795,000 Total regional expenses Regional income (loss) before 31,500 160,000 (45,000) corporate expenses Corporate expenses: 18,000 32,000 30,000 Advertising (general) 50,000 50,000 50,000 General administrative expense 68,000 80,000 82,000 Total corporate expenses S 78,000 S(125,000) S(36,500) Net operating income (loss)