EXERCISE 12-17 (20 MINUTES)

3. The following comments relate to the three markets:

Commercial market:

• The commercial market is the company’s strongest segment rather than

its weakest. It is generating enough segment margin by itself to cover

all of the company’s common costs.

• The manager of the commercial market is doing an outstanding job of

controlling expenses. Expenses as a percentage of sales are lower than

the company average for every category except cost of sales and adver-

tising, and these latter two costs do not seem out of line.

Home Market:

• The home market spends very little on advertising. A more generous

advertising budget may yield a substantial increase in sales in this seg-

ment.

• Order processing expenses are extremely high in the home market. Note

from the data in the problem that more orders are written in this market

(5,200 orders) than in the other two markets combined. This large

number of orders, combined with the low overall sales in the home mar-

ket, means that the home market is taking many small orders.

• Warehousing expenses are also high in the home market.

• The home market is not covering its own traceable costs. If sales can’t

be increased through a more generous advertising budget and through

a concerted effort to make larger sales per order and other actions, then

consideration should be given to eliminating this market segment.

School Market:

• The school market has extremely high sales support expenses. This is

because nearly as many sales calls are made to this market (11,000

calls) as are made to the other two markets combined. Can contacts be

made by phone or by other means?

• Over 60% of the packing and shipping expenses are traceable to the

Problem 12-27 (30 minutes)