Vabant PV of the Netherlands is a wholesale distributor of wine, in which it's sold throughout the European Community. The company profits are declining, which is causing a concern. To help understand the condition of the company, the managing director of the company has requested that the monthly income statement be segmented by sales territory. The accounting department has prepared the following statement for March, the most recent month, (The Dutch currency is euro which is designated by E=.)
Southern Middle Northern
Europe Europe Europe
Sales E=300,000 E=800,000 E=700,000
Territorial expenses (traceable):
Cost of goods sold 90,000 240,000 315,000
Salaries 54,000 56,000 112,000
Insurance 9,000 16,000 14,000
Advertising 105,000 240,000 245,000
Depreciation 21,000 32,000 28,000
Shipping 15,000 32,000 42,000
Total territorial expenses 297,000 616,000 756,000
Territorial income (loss) before
Corporate expenses 3,000 184,000 (56,000)
Advertising (general) 15,000 40,000 35,000
General administrative 20,000 20,000 20,000
Total corporate expenses 35,000 60,000 55,000
.Net operating income (loss) E=(32,000) E=124,000 E=(111,000)
Cost of goods sold and shipping expenses are both variable; other costs are all fixed. Vabant PV purchases of wine at auctions and cooperatives, and distributes them in the three territories listed above; each of the three sales territories has its own manager and sales staff. The wines vary widely in profitability; some have high and low margins
1. List any disadvantages or weaknesses, from the statement formatted above.
2. Explain the basis that is apparently being used to allocate the corporate expenses to the territories, are the allocations agreeable, and why?
3. Prepare a segmented contribution format income statement for May. Show a Total column as well as data for each territory. Include percentages for all columns and carry to one decimal place.
4. Analyze the statement prepared in (3)-what points can help improve the company's performance that can be presented to management?
The solution examines restructuring a segment income statement.