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 $260,000 $558,000 Less variable costs of goods sold (85,000) (172,880) $629,000 (340,000) Less commissions Contribution margin (5,500) $169,500 (30,500) $354,620 (22,500) $266,500 $1,447,000 (597,880) (58,500) $790,620 Less common fixed expenses: Fixed factory overhead Fixed selling and administrative Operating income (380,000) (299,000) $111,620 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 $81,000 Engineering hours 760 80 160 Setting up 183,000 Setup hours Customer service 115,000 Service calls 12,700 13,600 12,200 1,440 29,160 19,160 In addition, Model 1 requires the rental of specialized equipment costing $24,500 per year. Reshier Company Segmented Income Statement Model 1 Model 2 Model 3 Total Sales 260,000 558,000 $629,000 1,447,000 Less variable cost of goods sold -85,000 -172,880 -340,000 -597,880 Less commissions -5,500 30,500 V -22,500 -58,500 Contribution margin 169,500 354,620 V 266,500 V 790,620 Less traceable fixed expenses: Engineering 61.560 6.480 12.960 81,000 Setting up 42,990 41.297 98,708 183,000 Equipment rental 24,500 0 24,500 Customer service 45,730 4,842 64,427 115,000 Product margin -5,280 302.001 V 90,405 387,120 Less common fixed expenses: Factory overhead Selling and admin. expense Operating income Feedback 91,500 184,000 111,620 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 $ to operating income 3. What if Reshier Company can only avoid 180 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 $ to operating income