‘That commercial market has been dragging us down for years,’ complained Shanna Reynolds, managing director of Morley Products. ‘Just look at that anaemic profit figure for the commercial market. That market had 3 million pounds more in revenue than the home market, but only a few thousand pounds more in profits. What a loser it is!’ The statement of profit or loss to which Ms Reynolds was referring follows:

‘I agree,’ said Walt Divot, the company’s deputy managing director. ‘We need to focus more of our attention on the school market, since it’s our best segment. Maybe that will bolster profits and get the shareholders off our backs.’ The following additional information is available about the company:
1. Morley Products is a wholesale distributor of various goods; the cost of goods sold figures above are traceable to the markets in the amounts shown.
2. Sales support, order processing, and packing and shipping are considered by management to be variable costs. Warehousing, general management and advertising are fixed costs. These costs have all been allocated to the markets on the basis of revenue – a practice that the company has followed for years.
3. You have compiled the following data:

4. You have determined the following breakdown of the company’s advertising expense and general
management expense:

The company is searching for ways to improve profit, and you have suggested that a segmented statement in which costs are assigned on the basis of activities might provide some useful insights for management.

Required
1. Refer to the data in (3) above. Determine a rate for each cost pool. Then, using this rate, compute the amount of cost assignable to each market.
2. Using the data from Requirement 1 above and other data from the problem, prepare a revised segmented statement for the company. Use the contribution format. Show an amount column and a percentage column for the company as a whole and for each market segment. Carry percentage figures to one decimal place. (Remember to include warehousing among the fixed expenses.)
3. What, if anything, in your segmented statement should be brought to the attention of management? Explain.

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Revenue Less expenses: Cost of goods sold Sales support Order processing Warehousing Packing and shipping Advertising General management Total expenses Operating profit Total company % 20,000,000 100.0 9,500,000 3,600,000 1,720,000 940,000 520,000 1,690,000 1,310,000 19,280,000 720,000 47.5 18.0 8.6 4.7 2.6 8.5 6.6 96.4 3.6 Commercial market 8,000,000 3,900,000 1,440,000 688,000 376,000 208,000 676,000 524,000 7,812,000 188,000 Home School market market 5,000,000 7,000,000 2,400,000 900,000 430,000 235,000 130,000 422,500 327,500 4,845,000 155,000 3,200,000 1,260,000 602,000 329,000 182,000 591,500 458,500 6,623,000 377,000