ACC 305 Lecture 49: 49
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Mason Company has prepared consolidated financial statements for the current year and is now gathering information in connection with the following five operating segments it has identified. |
Company Total | Books | Computers | Maps | Travel | Finance | |||||||
Sales to outside parties | $ | 1,547 | $ | 121 | $ | 696 | $ | 416 | $ | 314 | 0 | |
Intersegment sales | 421 | 24 | 240 | 39 | 118 | 0 | ||||||
Interest income—external | 97 | 60 | 0 | 0 | 0 | $ | 37 | |||||
Interest income—intersegment loans | 147 | 0 | 0 | 0 | 0 | 147 | ||||||
Assets | 3,398 | 206 | 1,378 | 248 | 326 | 1,240 | ||||||
Operating expenses | 1,460 | 115 | 818 | 304 | 190 | 33 | ||||||
Expenses—intersegment sales | 198 | 70 | 51 | 31 | 46 | 0 | ||||||
Interest expense—external | 107 | 0 | 0 | 0 | 0 | 107 | ||||||
Interest expense—intersegment loans | 147 | 21 | 71 | 38 | 17 | 0 | ||||||
Income tax expense (savings) | 21 | 12 | (41) | 27 | 31 | (8) | ||||||
General corporate expenses | 55 | |||||||||||
Unallocated operating costs | 80 | |||||||||||
Determine the reportable segments by performing each applicable test. (Figures are in thousands.) (Round your percentage answers to 1 decimal place. Enter your answers in thousands of dollars.) |
Revenue test: |
Profit or loss test: |
Asset test: |
REDDEN CORPORATION
The REDDEN CORPORATION, a distributor of special pharmaceutical products, operates at capacity and has three main market segments:
General supermarket chains
Drugstore chains
Mom and Pop single store pharmacies
REDDEN reported the following data for 2017:
General Supermarket Chains | Drugstore Chains | Mom and Pop Single Stores | Total | |
Revenues | $3,708,000 | $3,150,000 | $1,980,000 | $8,838,000 |
Cost of Goods Sold | 3,600,000 | 3,000,000 | 1,800,000 | 8,400,000 |
Gross Margin | $108,000 | $150,000 | $180,000 | $438,000 |
Other operating costs | 301,080 | |||
Operating Income | $136,920 |
For many years, REDDEN has used gross margin percentages to evaluate the relative profitability of its market segments. But REDDEN recently attended a seminar on ABC and is considering using at REDDEN to analyze and allocate “other operating costs.” REDDEN meets with all the key managers and several of the operations and sales staff, and they agree that there are five key activities that drive other operating costs at REDDEN:
Activity Area Cost Driver
Order processing Number of customer purchasing orders
Line item processing Number of line items ordered by customers
Delivering to stores Number of store deliveries
Cartons shipped to store Number of cartons shipped
Stocking of customer store shelves Hours of shelf stocking
Each customer order consists of one or more line items. A line item represents a single product (such as Extra Strength Tylenol Tablets). Each product line item is delivered in one or more separate cartons. Each store delivery entails the delivery of one or more cartons of products to a customer. REDDEN’s staff stacks cartons directly onto display shelves in customers’ stores. Currently, there is no additional charge to the customer for shelf stocking, and not all customers use REDDEN for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2017 is shown below:
Activity | General Supermarket Chains | Drugstore Chains | Mom and Pop Single Stores | Total Cost of Activity in 2017 |
Orders processed | 140 | 360 | 1,500 | $80,000 |
Line items ordered | 1,960 | 4,320 | 15,000 | $63,840 |
Store deliveries made | 120 | 360 | 1,000 | $71,000 |
Cartons shipped to stores | 36,000 | 24,000 | 16,000 | $76,000 |
Shelf stocking (hours) | 360 | 180 | 100 | $10,240 |
$301,080 |
REQUIRED:
Compute the 2017 gross margin percentage for each of REDDEN’s three market segments.
Compute the cost driver rates for each of the five activity areas within the “other operating costs.”
Use ABC information to allocate the $301,080 of “other operating costs” to each of the market segments. Compute the operating income for each market segment.
Comment on the results. What new insights are available with the ABC information?