Vega Foods Inc. Quarterly Review of Subsidiary Vega Foods Inc. recently purchased a small mill that it intends to operate as one of its subsidiaries. The newly acquired mill offers three products for sale$$wheat cereal, pancake mix, and flour. They started the yearEach product currently sells for $$10$ per package. In March, they had a total sales revenue of $$600,000.$ Materials, labour, and other variable production costs are $$3\mathrm{.}00$ per bag of wheat cereal, $$4\mathrm{.}20$ per bag of pancake mix, and $$1\mathrm{.}80$ per bag of flour. Sales commissions are $10\%$ of sales for any product. All other costs are fixed. The mill's aggerate sales and expense details for March are given below: Expenses: Materials, labour, and other $$204,000\mathrm{.}00$ Sales commissions $ $60,000\mathrm{.}00$ Advertising $$123,000\mathrm{.}00$ Supervisor Salaries $ $66,000\mathrm{.}00$ Equipment depreciation $ $30,000\mathrm{.}00$ Warehouse rent $ $12,000\mathrm{.}00$ Selling and administrative $ $90,000\mathrm{.}00$ Total expenses $$585,000\mathrm{.}00$ The following additional information about the company is available: a$.$ The same equipment is used to mill and package all three products. In the above income statement, equipment depreciation has been allocated on the basis of sales dollars. An analysis of equipment usage indicates that $40\%$ of the time is used to make wheat cereal, $50\%$ of the time to make pancake mix, and $10\%$ of the time to make flour. b$.$ All three products are stored in the same warehouse. In the above income statement, the warehouse rent has been allocated on the basis of sales dollars. The warehouse contains $24,000$ square metres of space, of which $8,000$ square metres are used for wheat cereal, $14,000$ square metres are used for pancake mix, and $2,000$ square metres are used for flour. The warehouse space costs the company $$0\mathrm{.}50$ per square metre to rent. c$.$ Supervisor salaries have been traced at a monthly cost of $$34,000,$ $$21,000,$ and $$11,000$ for Wheat Cereal, Pancake Mix, and Flour, respectively. d$.$ The current advertising spend on each product is $$48,000$ on Wheat Cereal, $$60,000$ on Pancake Mix, and $$15,000$ on Flour. e$.$ The Other Selling and administrative costs relate to the administration of the company as a whole. These costs have been divided equally among the three product lines. f$.$ All other costs are traceable to the product lines. g$.$ The Marketing team has provided a $12-$month sales forecast for each product, with the actual number of units sold reported for the first quarter. Sales Forecast Wheat Cereal Pancake Mix Flour Jan $($Actual$)22,00028,00013,000$ Feb $($Actual$)18,00027,50010,000$ Mar $($Actual$)20,00030,00010,000$ Apr $17,50027,0009,550$ May $20,00028,00011,500$ Jun $17,50032,00012,500$ Jul $18,00027,50012,750$ Aug $21,50025,50010,500$ Sep $23,00032,50010,200$ Oct $20,00028,00011,500$ Nov $19,00030,00012,500$ Dec $17,50032,00014,000$ h$.$ The mill produces the same amount of each product every month, based on the average monthly sales forecast for the year. They started the year with $2,000$ units of Wheat Cereal, $500$ units of Pancake mix, and $2,000$ units of flour. They produce $20,000$ units of Wheat Cereal, $29,000$ units of Pancake Mix, and $11,500$ units of flour per month. i$.$ The finance department has provided the internal financial statements for the first quarter. The company uses variable costing for their internal reports but reconciles its net income for shareholders and external accounting purposes. Vega Foods Mill Income Statement Quarter $1$ Ending Mar $31$ Sales revenue $ $1,785,000$ Variable expenses: COGS Beg Balance $ $11,700$ COGM $ $607,500$ COG Available $ $619,200$ Ending Balance $ $20,700$ Cost of Goods Sold $ $598,500$ Commission $ $178,500$ $ $777,000$ Contribution margin $ $1,008,000$ Fixed expenses: Advertising $ $369,000$ Warehouse Rent $ $36,000$ Supervisor Salaries $ $198,000$ Other S&A $ $270,000$ Equipment Depreciation $ $90,000$ $ $963,000$ Net income $ $45,000$ Vega Foods Mill Budgeted Balance Sheet Quarter $1$ Ending Mar $31$ Assets Cash $ $169,000$ Accounts Receivable $480,000$ Inventory $20,700$ Fixed Assets, after depreciation $850,000$ Total assets $1,519,700$ Liabilities and Shareholders' Equity Accounts Payable $$101,250$ Common Shares $950,000$ Retained Earnings $423,450$ Net Income $ $45,000$ Total liabilities and shareholders' equity $ $1,519,700$ j$.$ The mill typically collects $20\%$ of its sales in the month of purchase, and the remaining $80\%$ of sales are collected the following month. The company pays $50\%$ of their variable production costs, with the remaining paid in the following month. All other expenses are paid in the month incurred. A colleague has already completed the Schedule of Cash Collections for the next quarter. Vega Foods Mill Schedule of Expected Cash Collections April May June Quarter March sales $480,000$ $$480,000$ April sales $108,100432,400$ $$540,500$ May sales $119,000476,000$ $$595,000$ June sales $124,000$ $$124,000$ Total cash collections $$588,100$ $$551,400$ $$600,000$ $$1,739,500$ At the quarterly meeting, executives expressed concern over the newly acquired subsidiary's performance for the previous quarter. The company typically strives for a minimum rate of return of $5\%.$ The plant manager has suggested dropping the Wheat Cereal from the product line. They believe that the savings on product advertising would substantially benefit the company's margin and ROI. The production team advised that salaried employees and all other production$-$related expenses could be reallocated to other products if the line was dropped One of the executive team members suggests adjusting the products' selling price to achieve the desired rate of return. The VP of Marketing says they can look into it$,$ but there isn't a lot of product differentiation in the market right now. They could coordinate with Research and Development to differentiate the product to justify a pricing change. However, at the moment the company is a price taker, not setter. They acknowledge a change in product and pricing will likely impact the reliability of the sales forecast. Still, if a new price can be set, they would, at the very least, be able to determine a minimum units to be sold for each month. They would need to determine what additional data they need before having clear answers. A member of the marketing team does mention that there may be an opportunity to increase sales by changing the advertising angle a bit. They could reposition their messaging to capitalize on some consumer trends. The new mill is a small operation that could be marketed as a more artisanal brand. There is potential to increase demand by $15\%$ for all three products. At this point, the operations manager speaks up$,$ reminding the team that they are at production capacity, as their existing equipment only has an operating maximum of $200$ hours per month. The executive team wants to hold off on any decisions until they have given the finance team some time to prepare the appropriate reports needed to accurately assess the mill's and each product's performance and evaluate the alternatives currently on the table. required $1.$ Prepare a new format contribution income segmented income statement for the First quarter. $2.$ WHat will be the effect on net operating income, if the wheat cereal is dropped? $3.$ Calculate the ROI for the products. $4.$ Determine whether the savings on product advertising will benefit the company$$s margin and ROI.