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Morley Products is a wholesale distributor that competes in three markets-Commercial, Home, and School. It prepared the following segmented income statement: Sales Less expenses:
Morley Products is a wholesale distributor that competes in three markets-Commercial, Home, and School. It prepared the following segmented income statement: Sales Less expenses: Total Company $ 20,000,000 100.0% Commercial Market $ 8,000,000 Home Market $ 5,000,000 School Market $ 7,000,000 Cost of goods sold Sales support Order processing Warehousing Packing and shipping Advertising General management Total expenses 9,500,000 3,600,000 18.0% 47.5% 3,900,000 2,400,000 3,200,000 1,440,000 900,000 1,260,000 1,720,000 8.6% 688,000 430,000 602,000 940,000 4.7% 376,000 235,000 329,000 520,000 2.6% 208,000 130,000 182,000 1,690,000 8.5% 676,000 422,500 591,500 1,310,000 6.5% 19,280,000 96.4% 524,000 7,812,000 327,500 4,845,000 458,500 6,623,000 Net operating income $ 720,000 3.6% $ 188,000 $ 155,000 $ 377,000 Although the Commercial Market has the highest sales, it reports much lower profit than the School Market. Therefore, management is considering shifting attention and resources away from the Commercial Market and towards the School Market. They have asked for your recommendation how to proceed. You have decided to create a properly formatted segmented income statement. To assist in this endeavor, you have gathered the following information: a. The cost of goods sold figures shown in the income statement above are traceable to their respective markets. b. Sales support, order processing, and packing and shipping are variable costs. Warehousing, general management, and advertising are fixed costs. In the income statement above, all of these costs have been allocated to the three markets on the basis of sales dollars. c. Using your knowledge of activity-based costing, you have compiled the following data: Cost Pool and (Allocation Base) Sales support (number of calls) order processing (number of orders) warehousing (square feet of space) Packing and shipping (pounds shipped) Amount of Activity Total Cost $ 3,600,000 Commercial Market School Home Market Market Total 8,000 5,000 11,000 24,000 $ 1,720,000 1,750 5,200 1,650 8,600 $ 940,000 $520,000 35,000 65,000 17,500 117,500 24,000 16,000 64,000 104,000 d. You have also determined the following breakdown of the company's advertising expense and general management expense: Commercial Total Market Home Market School Market Advertising: Traceable Common General management: $ 1,460,000 $ 700,000 $ 180,000 $ 580,000 $ 230,000 Traceable salaries Common $ 410,000 $ 150,000 $ 120,000 $ 140,000 $ 900,000
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