Morley Products is a wholesale distributor that competes in three markets—Commercial, Home, and School. It prepared the following segmented income statement:

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:

d. You have also determined the following breakdown of the company’s advertising expense and general management expense:

Required:

1. Refer to the data in part (c) above. Calculate an activity rate for each cost pool. Then, using those rates, allocate each cost pool to the company’s three markets.

2. Prepare a revised contribution format segmented income statement for the company. Include an “Amount” column and a “Percent” column for the company as a whole and for each market segment.

3. What insights from your segmented income statement should be brought to management’s attention? Explain.

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Total Commercial Home School Company Market Market Market Sales $20,000,000 100.0% $8,000,000 $5,000,000 $7,000,000 Less expenses: Cost of goods sold. Sales support.. Order processing Warehousing .... Packing and shipping. Advertising....... General management.. 9,500,000 47.5% 3,900,000 2,400,000 3,200,000 3,600,000 18.0% 1,440,000 900,000 1,260,000 1,720,000 8.6% 688,000 430,000 602,000 940,000 520,000 376,000 235,000 130,000 4.7% 329,000 2.6% 208,000 182,000 591,500 458,500 1,690,000 8.5% 676,000 422,500 1,310,000 6.5% 524,000 327,500 Total expenses. 19,280,000 96.4% 7,812,000 4,845,000 6,623,000 Net operating income.. 720,000 3.6% $ 188,000 $ 155,000 $ 377,000