Building Your Skills Analytical Thinking (LO7-4] Diversified Products, Inc., has recently acquired a small publishing company that offers three books for salea cookbook, a travel guide, and a handy speller. Each book sells for $16. The publishing company's most recent monthly income statement is shown below. Product line Total Travel Handy Company Cookbook Guide Speller $ 375,000 $145,000 $ 178,000 $ 52,000 Sales Expenses: Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities Total expenses Net operating income (loss) 122,000 47,000 73,000 2,000 52,000 31,000 19,500 1,500 22,500 8,700 10,680 3, 120 37,000 19,500 13,100 4,400 11,700 3,900 3,900 3,900 37,500 14,500 17,800 5,200 45,600 15,200 15,200 15,200 15,000 5,800 7, 120 2,080 9,000 3,000 3,000 3,000 352,300 148,600 163,300 40,400 $ 22,700 $ (3,600) $ 14,700 $ 11,600 The following additional information is available: a. Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales. b. The same equipment is used to produce all three books, so the equipment depreciation expense has been allocated equally among the three product lines. An analysis of the company's activities indicates that the equipment is used 40% of the time to produce cookbooks, 50% of the time to produce travel guides, and 10% of the time to produce handy spellers. c. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 60,000 square feet of space, of which 11,200 square feet is used by the cookbook line, 28,000 square feet by the travel guide line, and 20,800 square feet by the handy speller line. d. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars. e. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines. f. All other costs are traceable to the three product lines in the amounts shown on the income statement above. The management of Diversified Products, Inc., is anxious to improve the publishing company's 5% return on sales. Required: 1. Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided. 2. Based on the segmented income statements given in the problem, management plans to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. However, based on the new contribution format segmented income statement that you prepared: a. Do you agree with management's plan to eliminate the cookbook? b-1. Compute the contribution margin ratio for each product. b-2. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide? Complete this question by entering your answers in the tabs below. Req 1 Reg 2A Reg 2B Part 1 Req 2B Part 2 Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided. (Round your intermediate calculations to 2 decimal places.) Total Company Cookbook Travel Guide Handy Speller Variable expenses: Total variable expenses Traceable fixed expenses: Total traceable fixed expenses Common fixed expenses: Total common fixed expenses Complete this question by entering your answers in the tabs below. Req 1 Req 2A Reg 2B Part 1 Req 2B Part 2 Do you agree with management's plan to eliminate the cookbook? Yes No Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Part 1 Req 2B Part 2 Compute the contribution margin ratio for each product. (Round your answers to the nearest whole percent.) Cookbook Travel Guide Handy Speller % Contribution margin ratio % % Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Part 1 Req 2B Part 2 Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide? Yes No