Sales Expenses: Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation office facilities Total expenses Net operating income (loss) Total Company Cookbook $ 345,000 $116,000 116,000 41,000 36,000 16,000 20,700 6,960 31,000 16,000 9,900 3,300 34,500 11,600 46,200 15,400 13,800 4,640 7,200 2,400 315,300 117,300 $ 29,700 $ (1,300) Travel Handy Guide Speller $ 164,000 $ 65,000 64,400 10,600 16,500 3,500 9,840 3,900 10,400 4,600 3,300 3,300 16,400 6,500 15,400 15,400 6,560 2,600 2,400 2,400 145,200 52,800 $ 18,800 $ 12,200 The following additional information is available: a. 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. b. The same equipment is used to produce all three books, so the equipment depreciation cost has been allocated equally among the three product lines. An analysis of the company's activities indicates that the equipment is used 35% of the time to produce cookbooks, 55% of the time to produce travel guides, and 10% of the time to produce handy spellers. c. 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 55,200 square feet of space, of which 10,000 square feet is used by the cookbook line, 26,800 square feet by the travel guide line, and 18,400 square feet by the handy speller line. d. 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. e. 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. f. All other costs are traceable to the three product lines in the amounts shown on the income statement above. The management of Diversified Products, Inc., is anxious to improve the publishing company's 5% return on sales. 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. 2. Based on the segmented income statements given in the problem, management plans to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. However, based on the new contribution format segmented income statement that you prepared: a. Do you agree with management's plan to eliminate the cookbook? b-1. Compute the contribution margin ratio for each product. b-2. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide
