Reference no: EM13376402

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.