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Integration Exercise $15$ Segmented Income Statements; Contribution Margin Ratio; Activity$-$Based Cost Allocation $[$LO $5-3,$ LO $6-4,$ LO $7-4]$

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Diversified Products, Incorporated, has recently acquired a small publishing company that offers three books for sale$$a cookbook, a travel guide, and a handy speller. Each book sells for $$10.$ The publishing company$$s most recent monthly income statement is shown below.

Product Line

Total Company Cookbook Travel Guide Handy Speller

Sales $ $300,000$ $ $90,000$ $ $150,000$ $ $60,000$

Expenses:

Printing costs $102,00027,00063,00012,000$

Advertising $36,00013,50019,5003,000$

General sales $18,0005,4009,0003,600$

Salaries $33,00018,0009,0006,000$

Equipment depreciation $9,0003,0003,0003,000$

Sales commissions $30,0009,00015,0006,000$

General administration $42,00014,00014,00014,000$

Warehouse rent $12,0003,6006,0002,400$

Depreciation$$office facilities $3,0001,0001,0001,000$

Total expenses $285,00094,500139,50051,000$

Net operating income $($loss$)$ $ $15,000$ $ $(4,500)10,500$ $ $9,000$

The following additional information is available:

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.

The same equipment is used to produce all three books, so the equipment depreciation expense has been allocated equally among the three product lines. An analysis of the company$$s activities indicates that the equipment is used $30\%$ of the time to produce cookbooks, $50\%$ of the time to produce travel guides, and $20\%$ of the time to produce handy spellers.

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 $48,000$ square feet of space, of which $7,200$ square feet is used by the cookbook line, $24,000$ square feet by the travel guide line, and $16,800$ square feet by the handy speller line.

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.

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.

All other costs are traceable to the three product lines in the amounts shown on the income statement above.

The management of Diversified Products, Incorporated, is anxious to improve the publishing company$$s $5\%$ return on sales.

Integration Exercise $15$ Part $1$

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.