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.
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Model 1 |
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Model 2 |
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Model 3 |
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Total |
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Sales |
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$235,000 |
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$590,000 |
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$658,500 |
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$1,483,500 |
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Less variable costs of goods sold |
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(91,500) |
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(166,280) |
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(356,000) |
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(613,780) |
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Less commissions |
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(5,700) |
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(40,000) |
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(21,750) |
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(67,450) |
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Contribution margin |
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$137,800 |
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$383,720 |
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$280,750 |
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$802,270 |
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Less common fixed expenses: |
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Fixed factory overhead |
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(385,000) |
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Fixed selling and administrative |
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(307,000) |
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Operating income |
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$110,270 |
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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:
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Driver Usage by Model |
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Activity |
Activity Cost |
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Activity Driver |
Model 1 |
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Model 2 |
Model 3 |
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Engineering |
$86,000 |
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Engineering hours |
750 |
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71 |
179 |
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Setting up |
$196,000 |
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Setup hours |
12,100 |
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13,200 |
29,179 |
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Customer service |
$100,000 |
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Service calls |
13,400 |
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1,480 |
19,179 |
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In addition, Model 1 requires the rental of specialized equipment costing $22,000 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”.
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Reshier Company |
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Segmented Income Statement |
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Model 1 |
Model 2 |
Model 3 |
Total |
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Sales |
$ |
$ |
$ |
$ |
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Less variable cost of goods sold |
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Less commissions |
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|
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Contribution margin |
$ |
$ |
$ |
$ |
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Less traceable fixed expenses: |
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Engineering |
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|
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Setting up |
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Equipment rental |
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Customer service |
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Product margin |
$ |
$ |
$ |
$ |
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Less common fixed expenses: |
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Factory overhead |
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Selling and admin. expense |
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Operating income |
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$ |
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? (Keep Model 1 and Drop Model 1)
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 $_________ to operating income
3. What if Reshier Company can only avoid 164 hours of engineering time and 5,250 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 $__________ to operating income
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