Music Teachers, Inc., is an educational association for music teachers that has 20,000 members. The association operates from a central headquarters but has local membership chapters throughout the United States. Monthly meetings are held by the local chapters to discuss recent developments on topics of interest to music teachers. The associations magazine, Teachers Forum, is issued monthly with features about recent developments in the field. The association publishes books and reports and also sponsors professional courses that qualify for continuing professional education credit. The associations statement of revenues and expenses for the current year is presented below: Music Teachers, Inc. Statement of Revenues and Expenses For the Year Ended November 30 Revenues $ 3,275,000 Expenses: Salaries 920,000 Personnel costs 230,000 Occupancy costs 280,000 Reimbursement of member costs to local chapters 600,000 Other membership services 500,000 Printing and paper 320,000 Postage and shipping 176,000 Instructors fees 80,000 General and administrative 38,000 Total expenses 3,144,000 Excess of revenues over expenses $ 131,000 The board of directors of Music Teachers, Inc., has requested that a segmented income statement be prepared showing the contribution of each segment to the association. The association has four segments: Membership Division, Magazine Subscriptions Division, Books and Reports Division, and Continuing Education Division. Mike Doyle has been assigned responsibility for preparing the segmented income statement, and he has gathered the following data: a. The 20,000 members of the association pay dues of $100 per year, of which $20 covers a oneyear subscription to the Teachers Forum. Other benefits include membership in the association and chapter affiliation. The portion of the dues covering the magazine subscription ($20) should be assigned to the Magazine Subscriptions Division. b. A total of 2,500 one-year subscriptions to Teachers Forum were also sold last year to nonmembers and libraries at $30 per subscription. In addition to subscriptions, the magazine generated $100,000 in advertising revenues. c. The costs to produce the Teachers Forum magazine included $7 per subscription for printing and paper and $4 per subscription for postage and shipping. d. A total of 28,000 technical reports and professional texts were sold by the Books and Reports Division at an average selling price per unit of $25. Average costs per publication were $4 for printing and paper and $2 for postage and shipping. e. The association offers a variety of continuing education courses to both members and nonmembers. The one-day courses had a tuition cost of $75 each and were attended by 2,400 students. A total of 1,760 students took two-day courses at a tuition cost of $125 for each student. Outside instructors were paid to teach some courses. f. Salary costs and space occupied by division follow: Salaries Space Occupied (square feet) Membership $210,000 2,000 Magazine Subscriptions 150,000 2,000 Books and Reports 300,000 3,000 Continuing Education 180,000 2,000 Corporate staff 80,000 1,000 Total $920,000 10,000 Personnel costs are 25% of salaries in the separate divisions as well as for the corporate staff. The $280,000 in occupancy costs (which can be allocated to segments based on their square feet occupied) includes $50,000 in rental cost for a warehouse used by the Books and Reports Division for storage purposes. Assume that occupancy costs allocated to a particular division could be avoided if that division were eliminated. g. Printing and paper costs other than for magazine subscriptions and for books and reports relate to the Continuing Education Division. h. General and administrative expenses include costs relating to overall administration of the association as a whole. The companys corporate staff does some mailing of materials for general administrative purposes. i. The expenses that can be traced or assigned to the corporate staff, as well as any other expenses that are not traceable to the segments, will be treated as common costs. Mike Doyles data indicates that it is not necessary to distinguish between variable and fixed costs when preparing the segmented income statement for the association. Required: 1. Prepare a segmented income statement for the association according to the following: Do not distinguish between variable and fixed costs. Show the segment margin for each division as well as results for the association as a whole. Include all the items that compose the revenues and expenses for each division as well as for the association as a whole in the segmented income statement. Show all supporting computations for the segmented income statement in separate schedules. 2. Analyze the segmented income statement that you prepared. What insights do this statement reveal that you would bring to the board of directors attention? 3. Mike Doyle recommends that in order to increase the usefulness of the segmented income statement, he should equally allocate the common costs of the association to the four divisions. a. What is the impact of this recommendation on each division results? b. Give arguments for and against Mike Doyles recommendation. 4. Do you think it is appropriate to neglect the distinction between variable and fixed costs when preparing segmented income statements? What are the effects of this negligence? Explain your answer.