Problem 6-28 Segment Reporting; Activity-Based Cost Assignment [LO6-4]
Diversified Products, Inc., has recently acquired a small publishing company that offers three books for salea cookbook, a travel guide, and a handy speller. Each book sells for $15. The publishing companys most recent monthly income statement is shown below.
Problem 6-28 Segment Reporting; Activity-Based Cost Assignment [L06-4] 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 $15. The publishing company's most recent monthly income statement is shown below. Product line Total Travel Handy Company Cookbook Guide Spellen 360,000 $114,00 165,000 81,000 Sales Expenses: Printing costs Advertising General sales Salaries Equipment depreciation Sales Comm1551ons General administration Warehouse rent Depreciation-office facilities 114,000 39,000 48,000 14,700 6,840 45,000 20,000 3,100 36,000 11,400 15,200 4,560 2,200 25, 500 9,900 10100 3,100 16,500 64,200 10,800 7,800 4,860 10,200 14,800 3,100 8,100 15,200 15,200 3,240 2,200 21,600 9,300 45,600 14,400 6,600 6,600 2,200 340,500117,000153,4880100 Total expenses Net operating income (loss) 70,100 $ 19,500 (3,000) 11,600 10,900 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 25% of the time to produce cookbooks, 50% of the time to produce travel guides, and 25% 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 57,600 square feet of space, of which 9,600 square feet is used by the cookbook line, 26,400 square feet by the travel guide line, and 21,600 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 e. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These 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 6% return on sales line. This cost has been allocated to the product lines on the basis of sales dollars costs have been allocated equally to the three product lines
