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 $250,000 $590,000 $634,500 $1,474,500 Less variable costs of goods sold (88,500) (160,120) (360,400) (609,020) Less commissions (4,800) (36,500) (18,000) (59,300) Contribution margin $156,700 $393,380 $256,100 $806,180 Less common fixed expenses: Fixed factory overhead Fixed selling and administrative (420,000) (295,000) $91,180 Operating income 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 Model 3 Engineering Activity Cost $89,000 179,000 Activity Driver Engineering hours Setup hours Model 1 800 12,300 13,200 Model 2 74 12,300 126 Setting up 29,126 Customer service 101,000 Service calls 1,600 19,126 In addition, Model 1 requires the rental of specialized equipment costing $24,500 per year. Required: 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". Reshier Company Segmented Income Statement Model 1 Model 3 Total Sales 250,000 Less variable cost of goods sold 88,500 Less commissions 4,800 Contribution margin 156,700 Less traceable fixed expenses: Engineering 71,200 Setting up 40,982 Equipment rental 24,500 Customer service 39,296 Product margin -19,278 Less common fixed expenses: Factory overhead Selling and admin. expense Operating income 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 $ X to operating income 3. What if Reshier Company can only avoid 188 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 $ X to operating income 10000 10000 Model 2 590,000 160,120 36,500 393,380 6,586 40,982 4,763 341,049 634,500 360,400 18,000 256,100 11,214 97,047 0 56,938 102,126 GOO GOODD GOOD 1,474,500 609,020 806,180 179,000 101,000 412,680 127,500 194,000
