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		$245,000		$550,000		$642,000		$1,437,000
Less variable costs of goods sold		(98,000)		(168,480)		(352,800)		(619,280)
Less commissions		(5,100)		(33,000)		(20,750)		(58,850)
Contribution margin		$141,900		$348,520		$268,450		$758,870
Less common fixed expenses:
Fixed factory overhead								(410,000)
Fixed selling and administrative								(291,000)
Operating income								$57,870

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		$86,000			Engineering hours		700				70				230
Setting up		185,000			Setup hours		12,100				12,500				29,230
Customer service		111,000			Service calls		13,300				1,400				19,230

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		$86,000			Engineering hours		700				70				230
Setting up		185,000			Setup hours		12,100				12,500				29,230
Customer service		111,000			Service calls		13,300				1,400				19,230

In addition, Model 1 requires the rental of specialized equipment costing $24,000 per year.

Required:

Question Content Area

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".

blank Reshier Company Segmented Income Statement

	Model 1	Model 2	Model 3	Total
Sales	$_____	$______	$_________	$_______
Less variable cost of goods sold	_______	__________	_________	_________
Less commissions	________	___________	_________	___________
Contribution margin	$____	$_______	$________	$__________
Less traceable fixed expenses:
Engineering	_______	___________	________	_________
Setting up	______	__________	_______	________
Equipment rental	_______	___________	___________	________
Customer service	_______	_________	_________	__________
Product margin	$_____-	$_________	$__________	$___________
Less common fixed expenses:
Factory overhead				________
Selling and admin. expense				_________
Operating income				$_______

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.

Keeping Model 1Dropping Model 1Dropping Model 1 will add $______ to operating income

3. What if Reshier Company can only avoid 168 hours of engineering time and 5,150 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 1Dropping Model 1Keeping Model 1 will add $______to operating income