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		$230,000		$594,000		$608,000		$1,432,000
Less variable costs of goods sold		(96,000)		(170,240)		(340,400)		(606,640)
Less commissions		(6,000)		(36,000)		(23,250)		(65,250)
Contribution margin		$128,000		$387,760		$244,350		$760,110
Less common fixed expenses:
Fixed factory overhead								(420,000)
Fixed selling and administrative								(275,000)
Operating income								$65,110

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		780				80				140
Setting up		192,000			Setup hours		12,600				12,700				29,140
Customer service		109,000			Service calls		13,800				1,600				19,140

In addition, Model 1 requires the rental of specialized equipment costing $20,000 per year.

Required:

Question Content Area

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

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 (fill in the blank) to operating income?

Hep-Or-Drop Demon, Alterativas, et Coats Rasher Company makes three types of rug shampoo. Model the best med rested through here to ed erat. Model 2 more duced model with both dyard wing capabi. Model is the houding shampoo old to hotels and conversion etors. A segmented income se shown belon Model Model Model Sales $230,000 $994.000 5600,000 $1,432,000 Less varble costs of goods sold 56.000 (6.000 30,000) (23,250) Corbution or 1:20.000 $382.240 20.30 10.110 Land Fed factory word 20.000) Felseng and administrative 275.000 Opening 18.180 Wie i models have been margint, Recher Company red because operating income ise than 10 percent of sales and contore type of company. The company's controller where tonal information on food cats to see they were so high. The following information on activities and drivers was gathered Driver Usage by Model Activity Cost Activity Driver Hotel Model Energ 101.000 gering hours 790 199,000 Setup hours 12.700 29.340 Customer 300,000 Serie 13,000 1.400 In addition Model requires the real olid pant cating $20,000 per year. Herede 1. Reformate the smarted income statement in the additional information on activities. Cheminste indicate any negara. Do NOT round interim calculations and required, round your answer to the nearest dollar. It amourt box does not require anesty leave it blank orier Recher Company Segmented Income Statement Mode Matel Modell Louble cost of goods LARS Cons Curibution margin Cul Omo! ||011 (not |Ch. Do Ob ini tament rental Customer service Product Less.com Testery verheid Selling and admin, pense