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		$235,000		$562,000		$613,500		$1,410,500
Less variable costs of goods sold		(96,000)		(173,760)		(346,000)		(615,760)
Less commissions		(6,000)		(31,000)		(21,000)		(58,000)
Contribution margin		$133,000		$357,240		$246,500		$736,740
Less common fixed expenses:
Fixed factory overhead								(410,000)
Fixed selling and administrative								(299,000)
Operating income								$27,740

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		$77,000			Engineering hours		720				79				201
Setting up		177,000			Setup hours		12,700				12,200				29,201
Customer service		106,000			Service calls		13,000				1,520				19,201

In addition, Model 1 requires the rental of specialized equipment costing $18,500 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".

blank Reshier Company Segmented Income Statement

	Model 1	Model 2	Model 3	Total
CashCommissionsCost of goods soldNet incomeSalesCash	$Cash	$Cash	$Cash	$Cash
Less customer servicesLess engineeringLess factory overheadLess variable cost of goods soldLess setting up	- Select -	- Select -	- Select -	- Select -
Less customer servicesLess engineeringLess factory overheadLess commissionsLess setting up	- Select -	- Select -	- Select -	- Select -
Contribution margin	$fill in the blank d48a2df9a03df7f_16	$fill in the blank d48a2df9a03df7f_17	$fill in the blank d48a2df9a03df7f_18	$fill in the blank d48a2df9a03df7f_19
Less traceable fixed expenses:
CommissionsCost of goods soldEngineeringFactory overheadSelling and admin. expense	- Select -	- Select -	- Select -	- Select -
CommissionsCost of goods soldFactory overheadSelling and admin. expenseSetting up	- Select -	- Select -	- Select -	- Select -
CommissionsCost of goods soldEquipment rentalFactory overheadSelling and admin. expense	- Select -	- Select -	- Select -	- Select -
CommissionsCost of goods soldCustomer serviceFactory overheadSelling and admin. expense	- Select -	- Select -	- Select -	- Select -
Product margin	$fill in the blank d48a2df9a03df7f_40	$fill in the blank d48a2df9a03df7f_41	$fill in the blank d48a2df9a03df7f_42	$fill in the blank d48a2df9a03df7f_43
Less common fixed expenses:
CommissionsCost of goods soldCustomer servicesEngineeringFactory overhead				- Select -
CommissionsCost of goods soldCustomer servicesEngineeringSelling and admin. expense				- Select -
Operating income				$fill in the blank d48a2df9a03df7f_48

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Feedback

1. Review what you have learned about segmented income statements in the chapter. To determine the traceable fixed costs, you will need to compute the activity rates for each activity to assign the costs of the activities to each product. Common fixed expenses are not traceable to the segments. They would remain even if one of the segments were eliminated.

Question Content Area

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 3db7d2ff8f8705b_3 to operating income

3. What if Reshier Company can only avoid 176 hours of engineering time and 5,500 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 3db7d2ff8f8705b_5 to operating income