solve question 3

17 Keep-Or-Drop Decision, Alternatives, Relevant Costs 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 $255,000 $594,000 $647,000 $1,496,000 Less variable costs of goods sold (85,000) (176,840) (339,200) (601,040) Less commissions (5,000) (25,000) (21,000) (51,000) Contribution margin $165,000 $392,160 $286,800 $843,960 Less common faced expenses: Fixed factory overhead (425,000) Fived selling and administrative (307,000) Operating income $111,960 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 $76,000 Engineering hours 780 146 Setting up 181.000 Setup hours 12.000 12,800 29,146 Customer service 105,000 Service calls 14.400 1,520 19,146 74 In addition, Model 1 requires the rental of specialized equipment costing $24,500 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" Ched My Work 202,000 Factory overhead Selling and admin. expense 111.960 Operating income Feedback Check My Work 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 climinated. th * 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 be at DC 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 $2,161 to operating income 3. What if Reshier Company can only avoid 184 hours of engineering time and 5,050 hours of setup time that are attributable to Model 17 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 66,454 X to operating income will add Check Partly corred Bin + Ch 17 Required: OX 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"O" pogle vreme Reshier Conipany Segmented Income Statement Model 1 Model 2 255.000 594,000 Model 3 Total 647.000 1.496.000 176,840 85.000 339.200 601040 Microsoft Edge 25,000 5.000 21.000 51.000 165,000 392.160 843.960 286,800 > PC Health Check 59.2007 5.624 7 11096 76,000 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 40.262 42,947 97.791 181,000 24.500 01 0 24.500 Adobe Acrobat DC 43.119 4.551 57,330 105.000 2.161 339.030 120.583 457.460 143,500 Selling and admin, expense 202.000 Operating income 111.960 WOW 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 fed expenses are not traceable to the segments. They would remain in eliminated