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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

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 $240,000 $590,000 $644,500 $1,474,500
Less variable costs of goods sold (87,000) (173,760) (356,800) (617,560)
Less commissions (4,700) (35,000) (18,750) (58,450)
Contribution margin $148,300 $381,240 $268,950 $798,490
Less common fixed expenses:
Fixed factory overhead (420,000)
Fixed selling and administrative (283,000)
Operating income $95,490

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 $88,000 Engineering hours 780 72 148
Setting up 188,000 Setup hours 12,500 13,400 29,148
Customer service 110,000 Service calls 13,900 1,600 19,148

In addition, Model 1 requires the rental of specialized equipment costing $25,000 per year.

Required:

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".

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.

Dropping Model 1 will add $_______ to operating income

3. What if Reshier Company can only avoid 172 hours of engineering time and 5,350 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 $______ to operating income

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