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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.

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 salewheat 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 $3.00 per bag of wheat cereal, $4.20 per bag of pancake mix, and $1.80 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 $204,000.00 Sales commissions $ 60,000.00 Advertising $123,000.00 Supervisor Salaries $ 66,000.00 Equipment depreciation $ 30,000.00 Warehouse rent $ 12,000.00 Selling and administrative $ 90,000.00 Total expenses $585,000.00 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 $0.50 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 month of march. 2. With calculations, show whether the company should drop the wheat cereal or not. 3. Calculate the ROI for the products. 4. Determine whether the savings on product advertising will benefit the companys margin and ROI.

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