Problem 10-26 Shoe Shock Innovations manufactures athletic shoe inserts that cus

Question

Problem 10-26

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.

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 stores.

Sole Inserts
Division Heel Inserts
Division Total Shoe
Shock Sales revenue $490,900 $2,543,000 $3,033,900 Less variable expenses 307,000 2,017,000 2,324,000 Contribution margin 183,900 526,000 709,900 Less traceable fixed expenses 124,100 348,700 472,800 Segment margin $59,800 $177,300 237,100 Common fixed costs 172,400 Net operating income $64,700 Prepare a segment margin income statement for Shoe Shock's two distribution channels. (If the amount is negative then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125).) Specialty Footwear Stores Drug Stores Total Shoe Shock Revenue Sole inserts Heel inserts Total variable expenses Less variable expenses Heel inserts Sole inserts Total variable expenses Contribution margin Traceable fixed expenses Segmented margin Common fixed Operating income

Explanation / Answer

Speciality footwear Drug store Total shoe shock Revenue: Sole inserts * 98180 392720 490900 Heal inserts ** 1907250 635750 2543000 Total Revenue 2005430 1028470 3033900 Less: Variable expenses: Sole inserts * 61400 245600 307000 Heal inserts ** 1512750 504250 2017000 Total variable expenses 1574150 749850 2324000 Contribution margin 431280 278620 709900 Less; traceable fixed costs *** 322600 290340 612940 Segment margin 108680 -11720 96960 Common fixed expenses **** 32260 Net operating income 64700 * Sales revenue and variable expenses of Sole inserts division is apportioned in the ratio of 20% and 80% between Speciality footwear and Drug store division ** Sales revenue and variable expenses of Heel inserts division is apportioned in the ratio of 75% and 25% between Speciality footwear and Drug store division Total fixed costs = Traceable fixed costs + common fixed costs                                   =472800 + 172400 = 645,200 *** 50 % of these fixed costs are traceable to speciaity footwear and 45% of these to Drug stores.         Speciality footwear = 50% of 645,200 = 322,600 , Drug store = 45% of $645,200 = 290,340 **** The balance $32,260 ($645,200 - $322,600 - $290,340 ) is common fixed costs.

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