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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 $225,000 $598,000 $603,500 $1,426,500 Less variable costs of goods sold (97,000) (171,120) (332,400) (600,520) Less commissions (4,500) (25,000) (23,250) (52,750) Contribution margin $123,500 $401,880 $247,850 $773,230 Less common fixed expenses: Fixed factory overhead (395,000) Fixed selling and administrative (315,000) Operating income $63,230

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 companys 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 $75,000 Engineering hours 730 79 191 Setting up 196,000 Setup hours 12,700 13,300 29,191 Customer service 111,000 Service calls 14,400 1,480 19,191

In addition, Model 1 requires the rental of specialized equipment costing $21,000 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".

Reshier Company Segmented Income Statement Model 1 Model 2 Sales V 225,000 $598,000 Less variable cost of goods sold 97,000 171,120 Less commissions V 4,500 25,000 Contribution margin 123,500 401,880 Less traceable fixed expenses: Engineering 54,750 5,925 Setting up - V 44,450 X 47,228 X X Equipment rental X X Customer service X X X Product margin X $ X $ X Less common fixed expenses: Factory overhead V 103,000 X Selling and admin. expense 204,000 X X 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? Model 3 Total 603,500 $1,426,500 332,400 600,520 23,250 52,750 247,850 773,230 14,325 75,000 103,657 X X X $ Customer service Product margin X Less common fixed expenses: Factory overhead 103,000 X Selling and admin. expense 204,000 X X 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 $ X to operating income 3. What if Reshier Company can only avoid 160 hours of engineering time and 4,900 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 $ X to operating income Check My Work 8 more Check My Work uses remaining Previous Next