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		$240,000		$586,000		$620,000		$1,446,000
Less variable costs of goods sold		(98,500)		(169,800)		(338,400)		(606,700)
Less commissions		(5,600)		(34,000)		(18,000)		(57,600)
Contribution margin		$135,900		$382,200		$263,600		$781,700
Less common fixed expenses:
Fixed factory overhead								(415,000)
Fixed selling and administrative								(307,000)
Operating income								$59,700

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 companys 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		$80,000			Engineering hours		770				72				158
Setting up		190,000			Setup hours		12,200				12,600				29,158
Customer service		106,000			Service calls		13,300				1,440				19,158

In addition, Model 1 requires the rental of specialized equipment costing $24,000 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	Model 2	Model 3	Total
___________	$___________	$__________	$__________	$____________
___________	____________	____________	___________	______________
___________	____________	____________	____________	_____________
Contribution margin	$___________	$___________	$__________	$____________
Less traceable fixed expenses:
_______________	______________	_____________	____________	___________
_______________	_____________	____________	___________	____________
______________	_____________	___________	_____________	____________
________________	______________	____________	_____________	_____________
Product margin	$_____________	$___________	$____________	$___________
Less common fixed expenses:
				_____________
				______________
Operating income				$____________

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?

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 if Reshier Company can only avoid 168 hours of engineering time and 4,800 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.

will add $_________ to operating income