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. Madel 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 Less variable costs of goods sold Less commissions $225,000 5601,500 1,416,500 95,500 (174,640) (34,0 (634,540) (65,150) 5716,810 $590,000 (4,900) (36,500) (23,750) Contribution margin $124,600 $378,860 $213,350 Less common fixed expenses: Fixed factory overhead Fixed selling and administrative (425,000) (291,000) $910 Operating income While all models have positive contribution margins, Reshier Company is concerned becauseoperating income is less than 10 percent of sales and is law for this type of company. The campany's contrller gathered additional information on fixed casts 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 84,000 Engineering hours 191,000 Setup hours 108,000 Service calls Setting up 12,200 13,300 29,213 Customer service 13,200 1,600 19,213 In addition, Model 1 requires the rental of specialized equipment costing $22,500 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" 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 yaur answer to the nearest dallar. If amount box does not require an entry, leave it blank or enter" Reshier Company Model 1 Model 2 Model 3 Total Contrbution margin Less traceable fixed expenses: Product margin Less common foced expenses: Operating income 2. Using your answer to Requirement 1, assme that Reshier Company is considering dropping any model with a negative product margin. VWhat are the alternatives? 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. will add to operating income 3. What il Reshier Company can only avoid 162 hours of engineering time and 5,450 hours of setup time that are attributable to Madel 1? How does that affect the alternatives presented in Requirement 22 Which alternative is more cost effective and by how much7 Do NOT round interim calculations and, if required, round your answer to the nearest dollar will add to operating income
