Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale-a cookbook, a travel guide, and a handy speller.

image text in transcribed

Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale-a cookbook, a travel guide, and a handy speller. Each book sells for $13. The publishing company's most recent monthly income statement is shown below. 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) The following additional information is available: Total Product line Travel Handy Company Cookbook Guide Speller 350,000 $110,000 170,000 $70,000 112,000 37,000 64,000 11,000 46,000 14,500 24,500 7,000 21,000 6,600 10,200 4,200 43,000 22,500 10,000 10,500 8,700 2,900 2,900 2,900 35,000 11,000 17,000 7,000 45,000 15,000 15,000 15,000 14,000 4,400 6,800 2,800 6,000 2,000 2,000 2,000 330,700 $ 19,300 $ 115,900 152,400 (5,900) S 17,600 $ 62,400 7,600 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 cost 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, 40% of the time to produce travel guides, and 20% 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 56,000 square feet of space, of which 9,200 square feet is used by the cookbook line, 26,000 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 4% 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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

College Accounting A Practical Approach

Authors: Jeffrey Slater, Brian Zwicker

11th Canadian Edition

132564440, 978-0132564441

More Books

Students also viewed these Accounting questions

Question

What is the difference between divided and selective attention?

Answered: 1 week ago

Question

Why is habituation important?

Answered: 1 week ago

Question

How Does Automatization Occur?

Answered: 1 week ago