Shoe Shock Innovations manufactures athletic shoe inserts that cushion the foot and reduce the impact of exercise on the joints. The company has two divisions, Sole Inserts and Heel Inserts. A segmented income statement from last month follows.

Chris Kelly is Shoe Shock’s sales manager. Although this statement provides useful information, Chris wants to know how well the company’s two distribution channels, specialty footwear stores and drug stores, are performing. Marketing data indicates that 35% of sole inserts and 60% of heel inserts are sold through specialty footwear stores. A recent analysis of corporate fixed costs revealed that 40% of all fixed costs are traceable to specialty footwear stores and 55% of all fixed costs to drug stores.

Required

a. Prepare a segment margin income statement for Shoe Shock’s two distribution channels.

b. Based on your analysis, what recommendations would you make to the company?

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Sole Inserts Heel Inserts Total Division Division Shoe Shock Sales revenue $600,000 $2,500,000 $3,100,000 Less variable expenses 408,000 2,000,000 2,408,000 Contribution margin Less traceable fixed expenses 192,000 500,000 692,000 120,000 350,000 470,000 Segment margin $ 72,000 $ 150,000 222,000 Common fixed costs 175,000 Net operating income $ 47,000