Help Save & Exit Subr Check my work Building Your Skills Analytical Thinking (LO7-4] 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. 7 Product line Total Travel Handy Company $315,000 S 96,000 Cookbook Guide Speller Sales Expenses Printing costs Advertising General nales S 156,000 $63,000 105,000 30,000 63,300 21,000 9,360 9,300 2,200 15,600 14,300 6,240 1,300 11,700 4,200 3,780 5,700 2,200 39,000 18,900 36,000 6,600 31,500 13.800 5,760 21,000 2,200 9,600 14,300 3,840 1,300 ces Salaries Equipment depreciation Sales comminnions General adminintration Warehouse rent 6,300 14,300 2,520 42,900 12,600 3,900 296,400 Depreciation-office facilities Total expenses 1,300 101,800 142,600 52,000 18,600 $ (5,800) Net operating income (loss) s 13.400 s11,000 The followina additional information is available: Saved Help Save & Exit Sub Check my work 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 expense has been allocated equally among the three product lines. An analysis of the company's 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 50,400 square feet of space, of which 7,800 square feet is used by the cookbook line, 24,600 square feet by the travel guide line, and 18,000 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 facilitles 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 6 % 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 cdokbook because it is not returning a profit, and to focus all avallable 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 marain ratio for each product. Next 2 of 2
