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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 $$265,000$ $$578,000$ $$602,500$ $$1,445,500$

Less variable costs of goods sold $(97,500)(159,240)(364,000)(620,740)$

Less commissions $(5,900)(28,000)(21,250)(55,150)$

Contribution margin $$161,600$ $$390,760$ $$217,250$ $$769,610$

Less common fixed expenses:

Fixed factory overhead $(425,000)$

Fixed selling and administrative $(279,000)$

Operating income $$65,610$

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 company's 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 $$87,000$ Engineering hours $79073137$

Setting up $183,000$ Setup hours $12,70012,70029,137$

Customer service $117,000$ Service calls $13,4001,60019,137$

In addition, Model $1$ requires the rental of specialized equipment costing $$22,500$ per year.

Required:

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$1.$ 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. If amount box does not require an entry, leave it blank or enter $"0".$

blank

Reshier Company

Segmented Income Statement

Model $1$ Model $2$ Model $3$ Total

Sales

$Sales

$Sales

$Sales

$Sales

Less variable cost of goods sold

Less variable cost of goods sold

Less variable cost of goods sold

Less variable cost of goods sold

Less variable cost of goods sold

Less commissions

Less commissions

Less commissions

Less commissions

Less commissions

Contribution margin $fill in the blank ced$41$ffd$4$fb$201$a$\_16$

$fill in the blank ced$41$ffd$4$fb$201$a$\_17$

$fill in the blank ced$41$ffd$4$fb$201$a$\_18$

$fill in the blank ced$41$ffd$4$fb$201$a$\_19$

Less traceable fixed expenses:

Engineering

Engineering

Engineering

Engineering

Engineering

Setting up

Setting up

Setting up

Setting up

Setting up

Equipment rental

Equipment rental

Equipment rental

Equipment rental

Equipment rental

Customer service

Customer service

Customer service

Customer service

Customer service

Product margin $fill in the blank ced$41$ffd$4$fb$201$a$\_40$

$fill in the blank ced$41$ffd$4$fb$201$a$\_41$

$fill in the blank ced$41$ffd$4$fb$201$a$\_42$

$fill in the blank ced$41$ffd$4$fb$201$a$\_43$

Less common fixed expenses:

Factory overhead

Factory overhead

Selling and admin. expense

Selling and admin. expense

Operating income $fill in the blank ced$41$ffd$4$fb$201$a$\_48$

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$1.$ Review what you have learned about segmented income statements in the chapter. To determine the traceable fixed costs, you will need to compute the activity rates for each activity to assign the costs of the activities to each product. Common fixed expenses are not traceable to the segments. They would remain even if one of the segments were eliminated.

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$2.$ Using your answer to Requirement $1,$ assume that Reshier Company is considering dropping any model with a negative product margin. What are the alternatives?

Keeping Model $1$ or dropping it

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.

Dropping Model $1$

will add $fill in the blank $73$df$8$a$02$c$033$fc$8\_3$

to operating income

$3.$ What if Reshier Company can only avoid $182$ hours of engineering time and $5,000$ 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.

Keeping Model $1$

will add $fill in the blank $73$df$8$a$02$c$033$fc$8\_5$

to operating income

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