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		$260,000		$558,000		$654,500		$1,472,500
Less variable costs of goods sold		(87,000)		(157,920)		(351,600)		(596,520)
Less commissions		(5,400)		(27,500)		(20,500)		(53,400)
Contribution margin		$167,600		$372,580		$282,400		$822,580
Less common fixed expenses:
Fixed factory overhead								(400,000)
Fixed selling and administrative								(315,000)
Operating income								$107,580

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		$77,000			Engineering hours		800				72				128
Setting up		199,000			Setup hours		13,000				12,300				29,128
Customer service		100,000			Service calls		14,200				1,580				19,128

In addition, Model 1 requires the rental of specialized equipment costing $21,500 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".

	Model 1	Model 2	Model 3	Total
Sales	$260000	$558000	$654500	$1472500
Less variable cost of goods sold	87000	157920	351600	596520
Less commissions	5400	27500	20500	53400
Contribution margin	$167600	$372580	$282400	$822580
Less traceable fixed expenses:
Engineering	$	$	$	$
Setting up	$	$	$	$
Equipment rental	$	$	$	$
Customer service	$	$	$	$
Product margin	$fill in the blank	$fill in the blank	$fill in the blank	$fill in the blank
Less common fixed expenses:
Factory overhead				$
Selling and admin. expense				$
Operating income				$fill in the blank

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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.

Dropping Model 1

will add $fill in the blank to operating income

3. What if Reshier Company can only avoid 170 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 $fill in the blank to operating income