Shoe Shock Innovations manufactures athletic shoe inserts that cushion the foot
ID: 2580308 • Letter: S
Question
Shoe Shock Innovations manufactures athletic shoe inserts that cushion the foot and reduce the impact of exercise on the joints. The company has two divisions, Sole Inserts and Heel Inserts. A segmented income statement from last month follows. Sole Inserts Division Heel Inserts Division Total Shoe Shock $490,000 $2,500,000 $2,990,000 2,000,000 2,300,000 690,000 468,000 222,000 170,000 $52,000 Sales revenue Less variable expenses Contribution margin Less traceable fixed expenses 300,000 190,000 120,000 $70,000 500,000 348,000 $152,000 Segment margin Common fixed costs Net operating income Chris Kelly is Shoe Shock's sales manager. Although this statement provides useful information, Chris wants to know how well the company's two distribution channels, specialty footwear stores and drug stores, are performing. Marketing data indicates that 20% of sole inserts and 75% of heel inserts are sold through specialty footwear stores. A recent analysis of corporate fixed costs revealed that 50% of all fixed costs are traceable to specialty footwear stores and 45% of all fixed costs to drug storesExplanation / Answer
Shoe Shock Innovations
Statement showing segment margin income for the company’s two distribution channels:
Segment margin income statement for the two distribution channels:
Specialty Footwear Stores
Drug Stores
Total Shoe Shock
Sales Revenue:
Sole Inserts
$98,000
$392,000
$490,000
Heel Insersts
$1,875,000
$625,000
$2,500,000
Total revenue
$1,973,000
$1,017,000
$2,990,000
Less: Variable costs
Sole Inserts
$60,000
$240,000
$300,000
Heel Inserts
$1,500,000
$500,000
$2,000,000
Total variable expenses
$1,560,000
$740,000
$2,300,000
Contribution Margin
$413,000
$277,000
$690,000
Less: traceable fixed costs
$319,000
$287,100
$606,100
Segment margin
$94,000
($10,100)
$83,900
Common fixed costs
$31,900
Net operating income
$52,000
Notes:
1.sales revenue of sole inserts and heel inserts has been allocated to the two divisions as follows,
Specialty footwear store drug stores
Sole inserts proportion 20% 80%
Sales revenue $490,000 490,000 x 20% 490,000 x 80%
Sales revenue of Sole inserts $98,000 $392,000
Heel inserts proportion 75% 25%
Sales revenue $2,500,000 2,500,000 x 75% 2,500,000 x25%
Sales revenue of Heel inserts $1,875,000 $625,000
Proportionate Variable cost for each division is as follows (based on sales revenue allocation)
Variable expenses:
Sole inserts $300,000 20% of 300,000 80% of 300,000
$60,000 $240,000
Heel inserts $2,000,000 $1,500,000 $500,000
Allocation of fixed expenses:
50% of all fixed costs traceable to specialty footwear store –
All fixed costs = traceable fixed costs + common fixed costs
= $468,000 + $170,000 = $638,000
50% traceable to specialty footwear store = 50% of 638,000 = $319,000
45% traceable to drug store = 45% of 638,000 = $287,100
Remaining 5% are common fixed costs = 5% of 638,000 = $31,900
Segment margin income statement for the two distribution channels:
Specialty Footwear Stores
Drug Stores
Total Shoe Shock
Sales Revenue:
Sole Inserts
$98,000
$392,000
$490,000
Heel Insersts
$1,875,000
$625,000
$2,500,000
Total revenue
$1,973,000
$1,017,000
$2,990,000
Less: Variable costs
Sole Inserts
$60,000
$240,000
$300,000
Heel Inserts
$1,500,000
$500,000
$2,000,000
Total variable expenses
$1,560,000
$740,000
$2,300,000
Contribution Margin
$413,000
$277,000
$690,000
Less: traceable fixed costs
$319,000
$287,100
$606,100
Segment margin
$94,000
($10,100)
$83,900
Common fixed costs
$31,900
Net operating income
$52,000
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