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 Sales $250,000 $554,000 $607,500 Total $1,411,500 Less variable costs of goods sold (100,000) (164,960) (334,800) (599,760) Less commissions (5,600) (30,000) (22,000) (57,600) Contribution margin $144,400 $359,040 $250,700 $754,140 Less common fixed expenses: (390,000) (315,000) $49,140 Fixed factory overhead i Fixed selling and administrative 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 Activity Engineering Driver Usage by Model Activity Cost Activity Driver Model 1 Model 2 Model 3 $84,000 Engineering hours 780 78 142 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 $84,000 Engineering hours 780 78 142 Setting up 196,000 Setup hours 12,100 13,400 29,142 Customer service 102,000 Service calls 14,300 1,600 19,142. In addition, Model 1 requires the rental of specialized equipment costing $23,000 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 Sales Less variable cost of goods sold Less commissions Model 2 Model 3 Total 250,000 100,000 $54,000 164,960 607,500 334,800 V 1,411,500 599,760 5,400 30,000 22,000 V 57,400 Reshier Company Segmented Income Statement Model 1 Model 2 Model 31 Total Sales 250,000 554,000 607,500 1,411,500 Less variable cost of goods sold 100,000 164,960 334,800 599,760 Less commissions 5,600 30,000 22,000 V 57,600 Contribution margin 144,400 359,040 250,700 754,140 Less traceable fixed expenses: Engineering 65,520 6,552 V 11,928 84,000 Setting up 43,402 V 48,066 V 104,532 196,000 Equipment rental 23,000 23,000 Customer service 41,624 4,657 V 55,719 102,000 Product margin -29,146 V 299,765 78,521 349,140 Less common fixed expenses: Factory overhead Selling and admin, expense Operating income Exec 349,140 349,140 X 49,140 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 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". Sales Reshier Company Segmented Income Statement Model 1 250,000 Model 2 Model 3 Total 554,000 607,500 1,411,500 Less variable cost of goods sold 100,000 164,960 334,800 599,760 Less commissions 5,600 30,000 22,000 57,600 Contribution margin Less traceable fixed expenses: 144,400 359,040 250,700 754,140 Engineering 65,520 6,552 11,928 84,000 Setting up 43,402 48,066 V 104,532 196,000 Equipment rental 21,000 V 23,000 Customer service 41,624 4,457 55,719 102,000 Product margin -29,146 299,765 78,521 349,140 Less common fixed expenses: Factory overhead Selling and admin, expense Operating income 349,140 X 349,140 X 49,140 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 s to operating income 3. What if Reshier Company can only avoid 172 hours of engineering time and 4,900 hours of setup time that are attributable to Model 17 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 to operating income Feedback 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 $554,000 $607,500 $1,411,500 Less variable costs of goods sold (100,000) (164,960) (334,800) (599,760) Less commissions (5,600) (30,000) (22,000) (57,600) Contribution margin $144,400 $359,040 $250,700 $754,140 Less common fixed expenses: Fixed factory overhead Fixed selling and administrative (390,000) (315,000) Operating income $49,140 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 Engineering $84,000 Engineering hours 780 Model 2 78 Model 3 Setting up 196,000 Setup hours 12,100 Customer service 102,000 Service calls 14,300 13,400 1,600 142 29,142 19,142