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 $250,000 $590,000 $619,500 $1,459,500 Less variable costs of goods sold (86,000) (160,560) (332,800) (579,360) Less commissions (5,200) (34,500) (23,750) (63,450) Contribution margin $158,800 $394,940 $262,950 $816,690 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (283,000) Operating income $158,690 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 $77,000 Engineering hours 700 77 223 Setting up 197,000 Setup hours 12,000 12,500 29,223 Customer service 113,000 Service calls 13,700 1,480 19,223 In addition, Model 1 requires the rental of specialized equipment costing $18,000 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 Model 3 Total Sales $ $ $ $ Less variable cost of goods sold Less commissions Contribution margin $ $ $ $ Less traceable fixed expenses: Engineering Setting up Equipment rental Customer service Product margin $ $ $ $ Less common fixed expenses: Factory overhead Selling and admin. expense Operating income $ 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 $ to operating income 3. What if Reshier Company can only avoid 186 hours of engineering time and 5,500 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.
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 | $250,000 | $590,000 | $619,500 | $1,459,500 | |||||
| Less variable costs of goods sold | (86,000) | (160,560) | (332,800) | (579,360) | |||||
| Less commissions | (5,200) | (34,500) | (23,750) | (63,450) | |||||
| Contribution margin | $158,800 | $394,940 | $262,950 | $816,690 | |||||
| Less common fixed expenses: | |||||||||
| Fixed factory overhead | (375,000) | ||||||||
| Fixed selling and administrative | (283,000) | ||||||||
| Operating income | $158,690 |
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 | $77,000 | Engineering hours | 700 | 77 | 223 | |||||||||||
| Setting up | 197,000 | Setup hours | 12,000 | 12,500 | 29,223 | |||||||||||
| Customer service | 113,000 | Service calls | 13,700 | 1,480 | 19,223 |
In addition, Model 1 requires the rental of specialized equipment costing $18,000 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 | Model 3 | Total | |
| Sales | $ | $ | $ | $ |
| Less variable cost of goods sold | ||||
| Less commissions | ||||
| Contribution margin | $ | $ | $ | $ |
| Less traceable fixed expenses: | ||||
| Engineering | ||||
| Setting up | ||||
| Equipment rental | ||||
| Customer service | ||||
| Product margin | $ | $ | $ | $ |
| Less common fixed expenses: | ||||
| Factory overhead | ||||
| Selling and admin. expense | ||||
| Operating income | $ |
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 $ to operating income
3. What if Reshier Company can only avoid 186 hours of engineering time and 5,500 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.
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