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)
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