Question
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
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 $11. The publishing companys most recent monthly income statement is given below: |
The following additional information is available about the company: |
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 statement above. Sales commissions are 10% of sales for any product. |
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 companys activities indicates that the equipment is used 30% of the time to produce cookbooks, 50% 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 54,400 square feet of space, of which 8,800 square feet is used by the cookbook line, 25,600 square feet by the travel guide line, and 20,000 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 statement above. |
The management of Diversified Products, Inc., is anxious to improve the publishing company's 5% return on sales. |
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