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 $255,000 $578,000 $645,000 $1,478,000 Less variable costs of goods sold (94,500) (173,760) (337,200) (605,460) Less commissions (5,200) (39,000) (21,500) (65,700) Contribution margin $155,300 $365,240 $286,300 $806,840 Less common fixed expenses: Fixed factory overhead (425,000) Fixed selling and administrative (291,000) Operating income $90,840 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 $79,000 Engineering hours 710 75 215 Setting up 177,000 Setup hours 12,300 12,000 29,215 Customer service 105,000 Service calls 14,500 1,540 19,215 In addition, Model 1 requires the rental of specialized equipment costing $20,000 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"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 2 Model 3 Total Sales V 255,000 $ 578,000 645,000 1,478,000 Less variable cost of goods sold -94,500 -173,760 -337,200 605,460 V Less commissions V 5,200 39,000 -21,500 -65,700 Contribution margin 155,300 365,240 286,300 806,840 Less traceable fixed expenses: Engineering 56,090 5,925 -16,985 -79,000 Setting up 40,682 39,690 96,628 V 177,000 Equipment rental -20,000 -20,000 Customer service -43,185 V 4,587 57,228 V 105,000 Product margin -4,657 315,038 115,459 425,840 Less common fixed expenses: Factory overhead 149,000 Selling and admin. expense 186,000 Operating income 90,8402. 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 $ 4,657 to operating income 3. What if Reshier Company can only avoid 160 hours of engineering time and 4,950 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