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 TotalSales $235,000 $578,000 $648,500 $1,461,500 Less variable costs of goods sold (86,000) (154,840) (340,800) (581,640) Less commissions (5,100) (38,000) (22,000) (65,100) Contribution margin $143,900 $385,160 $285,700 $814,760 Less common fixed expenses: Fixed factory overhead (385,000) Fixed selling and administrative (295,000) Operating income $134,760

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 ModelActivityActivity Cost Activity DriverModel 1 Model 2 Model 3Engineering $76,000 Engineering hours 790 78 132 Setting up 177,000 Setup hours 12,500 13,300 29,132 Customer service 116,000 Service calls 13,200 1,600 19,132

In addition, Model 1 requires the rental of specialized equipment costing $20,500 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".

Model 1Model 2Model 3TotalCashCommissionsCost of goods soldNet incomeSalesSales$Sales$Sales$Sales$SalesLess customer servicesLess engineeringLess factory overheadLess variable cost of goods soldLess setting upLess variable cost of goods soldLess variable cost of goods soldLess variable cost of goods soldLess variable cost of goods soldLess variable cost of goods soldLess customer servicesLess engineeringLess factory overheadLess commissionsLess setting upLess commissionsLess commissionsLess commissionsLess commissionsLess commissionsContribution margin$fill in the blank 0b0265091fce07e_16$fill in the blank 0b0265091fce07e_17$fill in the blank 0b0265091fce07e_18$fill in the blank 0b0265091fce07e_19Less traceable fixed expenses: CommissionsCost of goods soldEngineeringFactory overheadSelling and admin. expenseEngineeringEngineeringEngineeringEngineeringEngineeringCommissionsCost of goods soldFactory overheadSelling and admin. expenseSetting upSetting upSetting upSetting upSetting upSetting upCommissionsCost of goods soldEquipment rentalFactory overheadSelling and admin. expenseEquipment rentalEquipment rentalEquipment rentalEquipment rentalEquipment rentalCommissionsCost of goods soldCustomer serviceFactory overheadSelling and admin. expenseCustomer serviceCustomer serviceCustomer serviceCustomer serviceCustomer serviceProduct margin$fill in the blank 0b0265091fce07e_40$fill in the blank 0b0265091fce07e_41$fill in the blank 0b0265091fce07e_42$fill in the blank 0b0265091fce07e_43Less common fixed expenses: CommissionsCost of goods soldCustomer servicesEngineeringFactory overheadFactory overhead Factory overheadCommissionsCost of goods soldCustomer servicesEngineeringSelling and admin. expenseSelling and admin. expense Selling and admin. expenseOperating income $fill in the blank 0b0265091fce07e_48

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 1Dropping Model 1Keeping Model 1 or dropping itKeeping 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 $fill in the blank c2d1a8f5100d077_3 to operating income

3. What if Reshier Company can only avoid 186 hours of engineering time and 4,950 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 $fill in the blank c2d1a8f5100d077_5 to operating income