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Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale-a cookbook, a travel guide, and a handy speller. Each book sells for $12. The publishing company's most recent monthly income statement is shown below. Product line Total Travel Handy Company Cookbook Guide Speller $ 355,000 $125,000 $ 168,000 $ 62,000 1,400 Sales Expenses: Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities Total expenses Net operating income (loss) 118,000 43,000 38,000 19, 100 21,300 7,500 33,000 18,000 10,500 3,500 35,500 12,500 46,800 14,200 7,800 2,600 325,100 126,800 $ 29,900 $ (1,800) 15,600 5,000 66,000 9,000 17,500 10,080 3, 720 10,600 4,400 3,500 3,500 16,800 6,200 15,600 6,720 2,480 2,600 2,600 149,400 48,900 $ 18,600 $ 13, 100 15,600 The following additional information is available: a. Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales. b. The same equipment is used to produce all three books, so the equipment depreciation cost has been allocated equally among the three product lines. An analysis of the company's activities indicates that the equipment is used 20% of the time to produce cookbooks, 45% of the time to produce travel guides, and 35% of the time to produce handy spellers. C. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 56,800 square feet of space, of which 10,400 square feet is used by the cookbook line, 27,200 square feet by the travel guide line, and 19,200 square feet by the handy speller line. d. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars. e. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines. f. All other costs are traceable to the three product lines in the amounts shown on the income statement above. The management of Diversified Products, Inc., is anxious to improve the publishing company's 4% return on sales. Required: 1. Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided. 2. Based on the segmented income statements given in the problem, management plans to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. However, based on the new contribution format segmented income statement that you prepared: a. Do you agree with management's plan to eliminate the cookbook? b-1. Compute the contribution margin ratio for each product. b-2. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide? Req 1 Req 2A Reg 2 B1 Req 2 B2 Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided. Total Company Cookbook Travel Guide Handy Speller Variable expenses: Total variable expenses Traceable fixed expenses: Total traceable fixed expenses Common fixed expenses: Total common fixed expenses Req 1 Req 2A Req 2 B1 Req 2 B2 Based on the segmented income statements given in the problem, management plans to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. However, based on the new contribution format segmented income statement that you prepared: Do you agree with management's plan to eliminate the cookbook? Show less Yes No
