Cornerstone Exercise 17.2 (Algorithmic) 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 $270,000 $594,000 $616,000 $1,480,000 Less variable costs of goods sold (94,000) (158,800) (334,000) (586,800) Less commissions (4,500) (33,000) (19,500) (57,000) Contribution margin $171,500 $402,200 $262,500 $836,200 Less common fixed expenses: Fixed factory overhead (405,000) Fixed selling and administrative (295,000) Operating income $136,200 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 companys 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 $81,000 Engineering hours 740 73 187 Setting up 200,000 Setup hours 12,400 12,000 29,187 Customer service 113,000 Service calls 13,700 1,480 19,187 In addition, Model 1 requires the rental of specialized equipment costing $19,000 per year. Required: Hide 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. Reshier Company Segmented Income Statement Model 1 Model 2 Model 3 Total $ $ $ $ Contribution margin $ $ $ $ Less traceable fixed expenses: Product margin $ $ $ $ Less common fixed expenses: 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? 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. will add $ to operating income 3. What if Reshier Company can only avoid 160 hours of engineering time and 4,800 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. will add $ to operating income