Streeterville 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 salewheat cereal, pancake mix, and flour. Each product sells for $10 per package. Materials, labor, and other variable production costs are $4.90 per bag of wheat cereal, $6.10 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 mills income statement for the most recent month is given below:

	Product Line
	Total Company			Wheat Cereal Pancake Mix						Flour
Sales	$	1,170,000		$	390,000		$	490,000		$	290,000
Expenses:
Materials, labor, and other		579,900			191,100			298,900			89,900
Sales commissions		117,000			39,000			49,000			29,000
Advertising		156,050			73,000			50,000			33,050
Salaries		98,500			43,300			10,200			45,000
Equipment depreciation		58,500			19,500			24,500			14,500
Warehouse rent		23,400			7,800			9,800			5,800
General administration		84,000			28,000			28,000			28,000
Total expenses		1,117,350			401,700			470,400			245,250
Net operating income (loss)	$	52,650		$	(11,700)		$	19,600		$	44,750

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 46,800 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 24,800 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.

Streeterville Foods management is anxious to improve the mills 4.5% 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.

2.	After seeing the income statement in the main body of the problem, management has decided to eliminate the wheat cereal because it is not returning a profit, and to focus all available resources on promoting the pancake mix.

Based on the statement you have prepared, do you agree with the decision to eliminate the wheat cereal?

Yes No