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Keep-Or-Drop Decision, Alternatives, Relevant Costs Reshier Company makes three types of rug shampooers. Model 1 is the basic model rented through hardware stores and supermarkets. Model 2 is a more advanced model with both dry-and wet-vacuuming capabilities. Model 3 is the heavy-duty riding shampooer sold to hotels and convention centers. A segmented income statement is shown below. Model 1 Model 2 Model 3 Total Sales $240,000 $550,000 $655,000 $1,445,000 Less variable costs of goods sold (96,000) (174,200) (354,000) (624,200) Less commissions (4,200) (27,500) (22,000) (53,700) Contribution margin $139,800 $348,300 $279,000 $767,100 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (291,000) Operating income $101,100 While all models have positive contribution margins, Reshier Company is concerned because operating income is less than 10 percent of sales and is low for this type of company. The company's controller gathered additional information on fixed costs to see why they were so high. The following information on activities and drivers was gathered: Driver Usage by Model Activity Activity Cost Activity Driver Model 1 Model 2 Model 3 Engineering Engineering hours 710 71 219 $88,000 198,000 Setting up Setup hours 12,400 13,200 29,219 Customer service 117,000 Service calls 14,500 1,460 19,219 In addition, Model 1 requires the rental of specialized equipment costing $21,500 per year. Required: 1. Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins. Do NOT round interim calculations and, if required, round your answer to the nearest dollar. If amount box does not require an entry, leave it blank or enter "0".

Keep-Or-Drop Decision, Alternatives, Relevant Costs Reshier Company makes three types of rug shampooers. Model 1 is the basic model rented through hardware stores and supermarkets. Model 2 is a more advanced model with both dry-and wet-vacuuming capabilities. Model 3 is the heavy-duty riding shampooer sold to hotels and convention centers. A segmented income statement is shown below. Model 1 Model 2 Model 3 Total Sales $240,000 $550,000 $655,000 $1,445,000 Less variable costs of goods sold (96,000) (174,200) (354,000) (624,200) Less commissions (4,200) (27,500) (22,000) (53,700) Contribution margin $139,800 $348,300 $279,000 $767,100 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (291,000) Operating income $101,100 While all models have positive contribution margins, Reshier Company is concerned because operating income is less than 10 percent of sales and is low for this type of company. The company's controller gathered additional information on fixed costs to see why they were so high. The following information on activities and drivers was gathered: Driver Usage by Model Activity Activity Cost Activity Driver Model 1 Model 2 Model 3 Engineering Engineering hours 710 71 219 $88,000 198,000 Setting up Setup hours 12,400 13,200 29,219 Customer service 117,000 Service calls 14,500 1,460 19,219 In addition, Model 1 requires the rental of specialized equipment costing $21,500 per year. Required: 1. Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins. Do NOT round interim calculations and, if required, round your answer to the nearest dollar. If amount box does not require an entry, leave it blank or enter "0".

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter11: Differential Analysis And Product Pricing
Section: Chapter Questions
Problem 16E
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Keep-Or-Drop Decision, Alternatives, Relevant Costs Reshier Company makes three types of rug shampooers. Model 1 is the basic model rented through hardware stores and supermarkets. Model 2 is a more advanced model with both dry-and wet-vacuuming capabilities. Model 3 is the heavy-duty riding shampooer sold to hotels and convention centers. A segmented income statement is shown below. Model 1 Model 2 Model 3 Total Sales $240,000 $550,000 $655,000 $1,445,000 Less variable costs of goods sold (96,000) (174,200) (354,000) (624,200) Less commissions (4,200) (27,500) (22,000) (53,700) Contribution margin $139,800 $348,300 $279,000 $767,100 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (291,000) Operating income $101,100 While all models have positive contribution margins, Reshier Company is concerned because operating income is less than 10 percent of sales and is low for this type of company. The company's controller gathered additional information on fixed costs to see why they were so high. The following information on activities and drivers was gathered: Driver Usage by Model Activity Activity Cost Activity Driver Model 1 Model 2 Model 3 Engineering $88,000 Engineering hours 710 71 219 Setting up 198,000 Setup hours 12,400 13,200 29,219 Customer service 117,000 Service calls 14,500 1,460 19,219 In addition, Model 1 requires the rental of specialized equipment costing $21,500 per year. Required: 1. Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins. Do NOT round interim calculations and, if required, round your answer to the nearest dollar. If amount box does not require an entry, leave it blank or enter "0".
Transcribed Image Text:Keep-Or-Drop Decision, Alternatives, Relevant Costs Reshier Company makes three types of rug shampooers. Model 1 is the basic model rented through hardware stores and supermarkets. Model 2 is a more advanced model with both dry-and wet-vacuuming capabilities. Model 3 is the heavy-duty riding shampooer sold to hotels and convention centers. A segmented income statement is shown below. Model 1 Model 2 Model 3 Total Sales $240,000 $550,000 $655,000 $1,445,000 Less variable costs of goods sold (96,000) (174,200) (354,000) (624,200) Less commissions (4,200) (27,500) (22,000) (53,700) Contribution margin $139,800 $348,300 $279,000 $767,100 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (291,000) Operating income $101,100 While all models have positive contribution margins, Reshier Company is concerned because operating income is less than 10 percent of sales and is low for this type of company. The company's controller gathered additional information on fixed costs to see why they were so high. The following information on activities and drivers was gathered: Driver Usage by Model Activity Activity Cost Activity Driver Model 1 Model 2 Model 3 Engineering $88,000 Engineering hours 710 71 219 Setting up 198,000 Setup hours 12,400 13,200 29,219 Customer service 117,000 Service calls 14,500 1,460 19,219 In addition, Model 1 requires the rental of specialized equipment costing $21,500 per year. Required: 1. Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins. Do NOT round interim calculations and, if required, round your answer to the nearest dollar. If amount box does not require an entry, leave it blank or enter "0".
Reshier Company Segmented Income Statement Model 1 Model 2 Sales 240,000 550,000 655,000 1,445,000 Less variable cost of goods sold 96,000 174,200 354,000 624,200 Less commissions 4,200 27,500 22,000 53,700 Contribution margin 139,800 348,300 279,000 ✓ 767,100 Less traceable fixed expenses: Engineering 62,480 ✔ 6,248 19,272 88,000 Setting up 44,787 47,677 105,536 198,000 Equipment rental 21,500 0 0 21,500 Customer service 48,225 4,856 63,919 117,000 Product margin -37,192 289,519 90,273 342,600 Less common fixed expenses: Factory overhead 67,500 Selling and admin. expense 174,000 Operating income 101,100 2. Using your answer to Requirement 1, assume that Reshier Company is considering dropping any model with a negative product margin. What are the alternatives? Keeping Model 1 or dropping it Which alternative is more cost effective and by how much? (Assume that any traceable fixed costs can be avoided.) Do NOT round interim calculations and, if required, round your answer to the nearest dollar. Dropping Model 1 ✔ will add $ 67,500 X to operating income 3. What if Reshier Company can only avoid 172 hours of engineering time and 4,850 hours of setup time that are attributable to Model 1? How does that affect the alternatives presented in Requirement 2? Which alternative is more cost effective and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest dollar. Keeping Model 1 will add $ 74,613 X to operating income Model 3 Total
Transcribed Image Text:Reshier Company Segmented Income Statement Model 1 Model 2 Sales 240,000 550,000 655,000 1,445,000 Less variable cost of goods sold 96,000 174,200 354,000 624,200 Less commissions 4,200 27,500 22,000 53,700 Contribution margin 139,800 348,300 279,000 ✓ 767,100 Less traceable fixed expenses: Engineering 62,480 ✔ 6,248 19,272 88,000 Setting up 44,787 47,677 105,536 198,000 Equipment rental 21,500 0 0 21,500 Customer service 48,225 4,856 63,919 117,000 Product margin -37,192 289,519 90,273 342,600 Less common fixed expenses: Factory overhead 67,500 Selling and admin. expense 174,000 Operating income 101,100 2. Using your answer to Requirement 1, assume that Reshier Company is considering dropping any model with a negative product margin. What are the alternatives? Keeping Model 1 or dropping it Which alternative is more cost effective and by how much? (Assume that any traceable fixed costs can be avoided.) Do NOT round interim calculations and, if required, round your answer to the nearest dollar. Dropping Model 1 ✔ will add $ 67,500 X to operating income 3. What if Reshier Company can only avoid 172 hours of engineering time and 4,850 hours of setup time that are attributable to Model 1? How does that affect the alternatives presented in Requirement 2? Which alternative is more cost effective and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest dollar. Keeping Model 1 will add $ 74,613 X to operating income Model 3 Total
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