Question

Losses have been incurred at Millard Corporation for some time. In an effort to isolate the problem and improve the company’s performance, management has requested that the monthly income statement be segmented by sales region. The company’s first effort at preparing a segmented statement is given below. This statement is for May, the most recent month of activity.    Sales Region West Central East   Sales $ 311,000     $ 798,000      $ 696,000       Regional expenses (traceable):        Cost of goods sold 96,000     236,000      318,000            Advertising 110,000     244,000      241,000            Salaries 52,000     55,000      109,000            Utilities 8,700     15,900      14,000            Depreciation 20,000     30,000      26,000            Shipping expense 29,000     32,000      41,000       Total regional expenses 315,700     612,900      749,000       Regional income (loss)     before corporate expenses ( 4,700)     185,100      (53,000)      Corporate expenses:        Advertising (general) 16,000     38,000      35,000            General administrative expense 22,000     22,000      22,000       Total corporate expenses 38,000     60,000      57,000       Net operating income (loss) $ (42,700)    $ 125,100      $ (110,000)          Cost of goods sold and shipping expense are both variable; other costs are all fixed. Millard Corporation is a wholesale distributor of office products. It purchases office products from manufacturers and distributes them in the three regions given above. The three regions are about the same size, and each has its own manager and sales staff. The products that the company distributes vary widely in profitability.    Required: 1. For each segment, identify the effect on the company's net operating income from dropping the segment. Enter each segment's effect in its respective space below.  Do not combine effects. Enter each segment's effect separately.       2. Calculate each segment's contribution margin ratio and enter it in its respective space below.  Do not combine ratios. Enter each segment's ratio separately. Round the percentage, not the decimal value, to one decimal (i.e. .1258 would be entered as 12.6).       3. The company has $5,500 of unused advertising funds available to spend on one of the segments. The additional revenue would be earned in the region in which the advertising takes place.   Marketing projects that the additional revenue ($10,450) that would be generated from this additional advertising would be the same, regardless of where (which region) the advertising occurs. In which region should the advertising occur to provide the greatest increase in company income?       4. If the company spends the $5,500 of advertising funds (from part 3, above) in the West region, and realizes the additional revenue of $10,450, what would be the increase/(decrease) in company income? Enter a decrease as a negative number. Round to the nearest whole dollar. operating income = West?

Answer 1

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Part 1
The effect on the company's net operating income from dropping the segment:
West	$                                    4,700	Increase
Central	$                                185,100	Decrease
East	$                                  53,000	Increase
Part 2
	West	Central	East
Sales	$                                311,000	$      798,000	$      696,000
Less: Variable Expenses
Cost of goods sold	$                                  96,000	$      236,000	$      318,000
Shipping expense	$                                  29,000	$        32,000	$        41,000
Contribution Margin	$                                186,000	$      530,000	$      337,000
Part 3
Contribution Margin Ratio (Contribution Margin/Sales)	59.81%	66.42%	48.42%
Since CM Ratio of Central is highest, additional advertising should be spent in central.
Part 4
Additional Revenue	$                                  10,450
Contribution Margin ($10,450*59.81%)	$                                    6,250
Less: Advertising Expense	$                                  (5,500)
Net increase in income	$                                        750