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 $245,000 $598,000 $636,500 $1,479,500 Less variable costs of goods sold (97,500) (162,320) (358,400) (618,220) Less commissions (4,200) (28,500) (20,250) (52,950) Contribution margin $143,300 $407,180 $257,850 $808,330 Less common fixed expenses: Fixed factory overhead (415,000) Fixed selling and administrative (299,000) Operating income $94,330 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 $75,000 800 70 130 Engineering hours Setup hours Setting up 179,000 101,000 12,900 13,500 12,900 1,420 29,130 19,130 Customer service Service calls In addition, Model 1 requires the rental of specialized equipment costing $23,500 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 Reshier Company Segmented Income Statement Model 1 Model 2 Model 3 Total Reshier Company Segmented Income Statement Model 1 Model 2 Model 3 Total Sales 245,000 598,000 636,500 1,479,500 Less variable cost of goods sold 97,500 162,320 358,400 618,220 Less commissions 4,200 28,500 20,250 52,950 143,300 $ 407,180 257,850 $ 808,330 Contribution margin Less traceable fixed expenses: Engineering 60,000 5,250 9,750 75,000 Setting up 42,037 42,037 94,926 179,000 Equipment rental 23,500 0 o 23,500 Customer service 40,044 4,214 56,742 101,000 Product margin -22,281 355,679 96,432 429,830 Less common fixed expenses: Factory overhead -137,500 Selling and admin. expense -198,000 Operating income 94,330 Feedback Check My Work 1. Review what you have learned about segmented income statements in the chapter. To determine the traceable fixed costs, you will need to compute the activity rates for each activity to assign the costs of the activities to each product. Common fixed expenses are not traceable to the segments. They would remain even if one of the segments were eliminated. 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. quipment rental 23,500 23,500 Customer service 40,044 4,214 56,742 101,000 Product margin -22,281 355,679 96,432 429,830 Less common fixed expenses: Factory overhead -137,500 Selling and admin. expense -198,000 94,330 Operating income Feedback Check My Work 1. Review what you have learned about segmented income statements in the chapter. To determine the traceable fixed costs, you will need to compute the activity rates for each activity to assign the costs of the activities to each product. Common fixed expenses are not traceable to the segments. They would remain even if one of the segments were eliminated. 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 round answer to the nearest dollar. 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 Dropping Model 1 will add $ 22,281 to operating income 3. What if Reshier Company can only avoid 188 hours of engineering time and 5,400 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 $ 17,000 X to operating income Feedback Feedback Check My Work Partially correct