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

Company Cookbook Travel

Guide Handy

Speller Sales $ 375,000 $ 145,000 $ 178,000 $ 52,000 Expenses: Printing costs 122,000 47,000 73,000 2,000 Advertising 52,000 31,000 19,500 1,500 General sales 22,500 8,700 10,680 3,120 Salaries 37,000 19,500 13,100 4,400 Equipment depreciation 11,700 3,900 3,900 3,900 Sales commissions 37,500 14,500 17,800 5,200 General administration 45,600 15,200 15,200 15,200 Warehouse rent 15,000 5,800 7,120 2,080 Depreciationoffice facilities 9,000 3,000 3,000 3,000 Total expenses 352,300 148,600 163,300 40,400 Net operating income (loss) $ 22,700 $ (3,600 ) $ 14,700 $ 11,600

The following additional information is available:

1. 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.
2. 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, 50% of the time to produce travel guides, and 10% of the time to produce handy spellers.
3. 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.
4. 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.
5. 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.
6. 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 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?