INTEGRATION EXERCISE 10 Segmented Income Statements; Activity Rates and Activity-Based Cost Allocation LO 6-4, LO 7-3, LO 7-4 Morley Products is a wholesale distributor that competes in three markets-Commercial, Home, and School. It prepared the following segmented income statement: Sales Less expenses: Total Company Commercial Home School Market Market Market $20,000,000 100.0% $8,000,000 $5,000,000 $7,000,000 Cost of goods sold Sales support 3,600,000 9,500,000 47.5% 3,900,000 2,400,000 3,200,000 18.0% 1,440,000 900,000 1,260,000 Order processing 1,720,000 8.6% 688,000 430,000 602,000 Warehousing 940,000 4.7% 376,000 235,000 329,000 Packing and shipping 520,000 2.6% 208,000 130,000 182,000 Advertising 1,690,000 8.5% 676,000 422,500 591,500 General management 1,310,000 6.5% 524,000 327,500 458,500 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 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: Amount of Activity Commercial Home Cost Pool and (Allocation Base) Sales support (number of calls) Total Cost School Market Market Market Total $3,600,000 11,000 8,000 5,000 24,000 Order processing (number of orders) $1,720,000 1,650 1,750 5,200 8,600 Warehousing (square feet of space) $940,000 17,500 35,000 65,000 117,500 Packing and shipping (pounds shipped) $520,000 64,000 24,000 16,000 104,000 d. You have also determined the following breakdown of the company's advertising expense and general management expense: Page 781 Commercial Home School Total Market Market Market Advertising: Traceable Common $1,460,000 $230,000 $700,000 $180,000 $580,000 General management: Traceable salaries Common $410,000 $150,000 $120,000 $140,000 $900,000 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.