Managerial Accounting

| August 31, 2017

Question
Vega Foods, Inc., has recently purchased a small mill that it intends to operate as one of its subsidiaries. The newly acquired mill has three products that it offers for sale—wheat cereal, pancake mix, and flour. Each product sells for $10 per package. Materials, labor, and other variable production costs are $4.30 per bag of wheat cereal, $5.50 per bag of pancake mix, and $3.10 per bag of flour. Sales commissions are 10% of sales for any product. All other costs are fixed.

The mill’s income statement for the most recent month is given below:

Product Line

Total
Company

Wheat
Cereal

Pancake
Mix

Flour

Sales

$

990,000

$

330,000

$

430,000

$

230,000

Expenses:

Materials, labor, and other

449,700

141,900

236,500

71,300

Sales commissions

99,000

33,000

43,000

23,000

Advertising

139,380

60,900

52,200

26,280

Salaries

105,000

51,000

21,000

33,000

Equipment depreciation

49,500

16,500

21,500

11,500

Warehouse rent

19,800

6,600

8,600

4,600

General administration

90,000

30,000

30,000

30,000

Total expenses

952,380

339,900

412,800

199,680

Net operating income (loss)

$

37,620

$

(9,900)

$

17,200

$

30,320

The following additional information is available about the company:

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 it is used 40% of the time 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 39,600 square feet of space, of which 8,000 square feet are used for wheat cereal, 14,000 square feet are used for pancake mix, and 17,600 square feet are used for flour. The warehouse space costs the company $0.50 per square foot per month to rent.

c.

The general administration costs relate to the administration of the company as a whole. In the above income statement, these costs have been divided equally among the three product lines.

d.

All other costs are traceable to the product lines.

Vega Foods’ management is anxious to improve the mill’s 3.80% margin on sales.

Required:

1.

Prepare a new contribution format segmented income statement for the month. Adjust the allocation of equipment depreciation and warehouse rent as indicated by the additional information provided.(Input all amounts as positive values except losses which should be indicated by a minus sign. Round your final answers to the nearest dollar amount.)

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