Music Teachers Incorporated, is an educational association for music teachers that has 20,000 members. The association operates from a central headquarters but has local membership chapters throughout the United States. Monthly meetings are held by the local chapters to discuss recent developments on topics of interest to music teachers. The association’s magazine, Teachers Forum, is issued monthly with features about recent developments in the field. The association publishes books and reports and also sponsors professional courses that qualify for continuing professional education credit. The association’s statement of revenues and expenses for the current year is presented below.
Music Teachers, Incorporated
Statement of Revenue and Expenses
For the Year Ended November 30
Revenues: 3,275,000
Expenses:
Salaries 920,000
Personnel costs 230,000
Occupancy cost 280,000
Reimbursement of member costs to local chapters 600,000
Other membership services 500,000
Printing and paper 320,000
Postage and shipping 176,000
Instructor’s fees 80,000
General and administrative 38,000
Total expenses 3,144,000
Excess of revenue over expenses. 131,000
The board of directors of music, Teachers, Incorporated, has requested that a segmented income statement be prepared showing the contribution of each segment to the association. The association has four segments: Membership Division, Magazine Subscriptions Division, Books and Reports Division, and Continuing Education Division. Mike Doyle has been assigned responsibility for preparing the segmented income statement, and he has gathered the following data:
a. The 20,000 members of the association pay dues of $100 per year, of which $20 covers a one-year subscription to the Teachers Forum. Other benefits include membership in the association and chapter affiliation. The portion of the dues covering the magazine subscription ($20) should be assigned to the Magazine Subscriptions Division.
b. A total of 2,500 one-year subscriptions to Teachers Forum were also sold last year to nonmembers and libraries at $30 per subscription. In addition to subscriptions, the journal generated $100,000 in advertising revenues.
c. The cost to produce the Teachers Forum magazine included $7 per subscription for printing and paper and $4 per subscription for postage and shipping.
d. A total of 28,000 technical reports and professional texts were sold by the Books and Reports Division. at an average selling price per unit of $25. Average costs per publication were $4 for printing and paper and $2 for postage and shipping.
e. The association offers a variety of continuing education courses to both members and nonmembers. The one-day course had a tuition cost of $75 each and were attended by 2,400 students. Outside instructors were paid to teach some courses.
f. Salary costs and space occupied by division follow:
Space Occupied (square
Salaries feet)
Membership $210,000 2,000
Magazine Subscriptions 150,000 2,000
Books and Reports 300,000 3,000
Continuing Education 1180,000 2,000
Corporate staff 80,000 1,000
Total $920,000 10,000
Personnel costs are 25% of salaries in the separate divisions as well as the corporate staff. The $280,000 in occupancy costs (which can be allocated to segments based on their square feet occupied) includes $50,000 in rental cost for a warehouse used by the Books and Reports Division for storage purposes. Assume that the cost could be avoided if the division were eliminated.
g. Printing and paper costs other than for magazine subscriptions and for books and reports relate to the Continuing Education Division.
h. General and administrative expenses include costs relating to overall administration of the association as a whole. The company’s corporate staff does some mailing of materials for general administrative purposes.
The expenses that can be traced or assigned to the corporate staff, as well as any other expenses that are not traceable to the segments, will be treated as common costs. It is not necessary to distinguish between variable and fixed costs.
Required:
I. Develop a segmented income statement for Music Teachers Incorporated. The statement should show the segment margin for each division as well as results for the association as a whole.
Music Teachers Incorporated operates with four segments: Membership Division, Magazine Subscriptions Division, Books and Reports Division, and Continuing Education Division. To prepare a segmented income statement, we will allocate revenues and expenses to each segment, as well as calculate the segment margin for each division.
Membership Division
Dues per member: 20,000 members * $100/member = $2,000,000
Portion assigned to Magazine Subscriptions Division: $20/member * 20,000 members = $400,000
Membership Division Revenues: $2,000,000 – $400,000 = $1,600,000
Magazine Subscriptions Division
Subscription sales to nonmembers and libraries: 2,500 subscriptions * $30/subscription = $75,000
Advertising revenues: $100,000
Magazine Subscriptions Division Revenues: $75,000 + $100,000 = $175,000
Books and Reports Division
Sales of technical reports and professional texts: 28,000 units * $25/unit = $700,000
Books and Reports Division Revenues: $700,000
Continuing Education Division
Tuition fees from 2,400 students: 2,400 students * $75/student = $180,000
Continuing Education Division Revenues: $180,000
Segment Expense
Membership Division
Salaries: $210,000
Personnel Costs: 25% of Salaries = 0.25 * $210,000 = $52,500
Occupancy Costs: $280,000 * (2,000 sq ft / 10,000 sq ft) = $56,000
Total Expenses: $210,000 + $52,500 + $56,000 = $318,500
Magazine Subscriptions Division
Salaries: $150,000
Personnel Costs: 25% of Salaries = 0.25 * $150,000 = $37,500
Occupancy Costs: $280,000 * (2,000 sq ft / 10,000 sq ft) = $56,000
Printing and Paper Costs: $7/subscription * 2,500 subscriptions = $17,500
Postage and Shipping Costs: $4/subscription * 2,500 subscriptions = $10,000
Total Expenses: $150,000 + $37,500 + $56,000 + $17,500 + $10,000 = $271,000
Books and Reports Division
Salaries: $300,000
Personnel Costs: 25% of Salaries = 0.25 * $300,000 = $75,000
Occupancy Costs: $280,000 * (3,000 sq ft / 10,000 sq ft) = $84,000
Printing and Paper Costs: $4/subscription * 28,000 units = $112,000
Postage and Shipping Costs: $2/subscription * 28,000 units = $56,000
Total Expenses: $300,000 + $75,000 + $84,000 + $112,000 + $56,000 = $627,000
Continuing Education Division
Salaries: $180,000
Personnel Costs: 25% of Salaries = 0.25 * $180,000 = $45,000
Printing and Paper Costs: $320,000
Total Expenses: $180,000 + $45,000 + $320,000 = $545,000
Segment Margins
Membership Division Revenue – Expenses = $1,600,000 – $318,500 = $1,281,500
Magazine Subscriptions Division Revenue – Expenses = $175,000 – $271,000 = -$96,000
Books and Reports Division Revenue – Expenses = $700,000 – $627,000 = $73,000
Continuing Education Division Revenue – Expenses = $180,000 – $545,000 = -$365,000
Association as a Whole:
Total Association Revenue: $1,600,000 + $175,000 + $700,000 + $180,000 = $2,655,000 Total Association Expenses: $318,500 + $271,000 + $627,000 + $545,000 = $1,761,500 Excess of Revenue over Expenses for the Association: $2,655,000 – $1,761,500 = $893,500
This segmented income statement provides a clear breakdown of each division’s contribution to the association and highlights areas that may require further attention, such as the Magazine Subscriptions and Continuing Education Divisions, which are currently operating at a loss. It also allows for better decision-making and resource allocation within the organization.
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