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		$265,000		$594,000		$611,000		$1,470,000
Less variable costs of goods sold		(96,500)		(170,240)		(348,800)		(615,540)
Less commissions		(4,600)		(33,500)		(19,000)		(57,100)
Contribution margin		$163,900		$390,260		$243,200		$797,360
Less common fixed expenses:
Fixed factory overhead								(405,000)
Fixed selling and administrative								(315,000)
Operating income								$77,360

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		$83,000			Engineering hours		730				79				191
Setting up		183,000			Setup hours		13,000				13,400				29,191
Customer service		120,000			Service calls		14,100				1,560				19,191

In addition, Model 1 requires the rental of specialized equipment costing $18,000 per year.

Required:

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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
CashCommissionsCost of goods soldNet incomeSalesSales	$Sales	$Sales	$Sales	$Sales
Less customer servicesLess engineeringLess factory overheadLess variable cost of goods soldLess setting upLess variable cost of goods sold	Less variable cost of goods sold	Less variable cost of goods sold	Less variable cost of goods sold	Less variable cost of goods sold
Less customer servicesLess engineeringLess factory overheadLess commissionsLess setting upLess commissions	Less commissions	Less commissions	Less commissions	Less commissions
Contribution margin	$fill in the blank b65df600c01c05a_16	$fill in the blank b65df600c01c05a_17	$fill in the blank b65df600c01c05a_18	$fill in the blank b65df600c01c05a_19
Less traceable fixed expenses:
CommissionsCost of goods soldEngineeringFactory overheadSelling and admin. expenseEngineering	Engineering	Engineering	Engineering	Engineering
CommissionsCost of goods soldFactory overheadSelling and admin. expenseSetting upSetting up	Setting up	Setting up	Setting up	Setting up
CommissionsCost of goods soldEquipment rentalFactory overheadSelling and admin. expenseEquipment rental	Equipment rental	Equipment rental	Equipment rental	Equipment rental
CommissionsCost of goods soldCustomer serviceFactory overheadSelling and admin. expenseCustomer service	Customer service	Customer service	Customer service	Customer service
Product margin	$fill in the blank b65df600c01c05a_40	$fill in the blank b65df600c01c05a_41	$fill in the blank b65df600c01c05a_42	$fill in the blank b65df600c01c05a_43
Less common fixed expenses:
CommissionsCost of goods soldCustomer servicesEngineeringFactory overheadFactory overhead				Factory overhead
CommissionsCost of goods soldCustomer servicesEngineeringSelling and admin. expenseSelling and admin. expense				Selling and admin. expense
Operating income				$fill in the blank b65df600c01c05a_48

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