2. 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 $240,000 $550,000 $655,000 $1,445,000 Less variable costs of goods sold (96,000) (174,200) (354,000) (624,200) Less commissions (4,200) (27,500) (22,000) (53,700) Contribution margin $139,800 $348,300 $279,000 $767,100 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (291,000) Operating income $101,100 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 $88,000 Engineering hours 710 71 219 Setting up 198,000 Setup hours 12,400 13,200 29,219 Customer service 117,000 Service calls 14,500 1,460 19,219 In addition, Model 1 requires the rental of specialized equipment costing $21,500 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". Model 1 Model 2 Model 3 Total $- Select - $- Select - $- Select - $- Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - Contribution margin $fill in the blank 28fc3a008fdefe6_16 $fill in the blank 28fc3a008fdefe6_17 $fill in the blank 28fc3a008fdefe6_18 $fill in the blank 28fc3a008fdefe6_19 Less traceable fixed expenses: - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - Product margin $fill in the blank 28fc3a008fdefe6_40 $fill in the blank 28fc3a008fdefe6_41 $fill in the blank 28fc3a008fdefe6_42 $fill in the blank 28fc3a008fdefe6_43 Less common fixed expenses: - Select - - Select - Operating income $fill in the blank 28fc3a008fdefe6_48 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? 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. will add $fill in the blank 68f9bb06d038fae_3 to operating income 3. What if Reshier Company can only avoid 172 hours of engineering time and 4,850 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. will add $fill in the blank 68f9bb06d038fae_5 to operating income

2. 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 $240,000 $550,000 $655,000 $1,445,000 Less variable costs of goods sold (96,000) (174,200) (354,000) (624,200) Less commissions (4,200) (27,500) (22,000) (53,700) Contribution margin $139,800 $348,300 $279,000 $767,100 Less common fixed expenses: Fixed factory overhead (375,000) Fixed selling and administrative (291,000) Operating income $101,100 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 $88,000 Engineering hours 710 71 219 Setting up 198,000 Setup hours 12,400 13,200 29,219 Customer service 117,000 Service calls 14,500 1,460 19,219 In addition, Model 1 requires the rental of specialized equipment costing $21,500 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". Model 1 Model 2 Model 3 Total $- Select - $- Select - $- Select - $- Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - Contribution margin $fill in the blank 28fc3a008fdefe6_16 $fill in the blank 28fc3a008fdefe6_17 $fill in the blank 28fc3a008fdefe6_18 $fill in the blank 28fc3a008fdefe6_19 Less traceable fixed expenses: - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - - Select - Product margin $fill in the blank 28fc3a008fdefe6_40 $fill in the blank 28fc3a008fdefe6_41 $fill in the blank 28fc3a008fdefe6_42 $fill in the blank 28fc3a008fdefe6_43 Less common fixed expenses: - Select - - Select - Operating income $fill in the blank 28fc3a008fdefe6_48 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? 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. will add $fill in the blank 68f9bb06d038fae_3 to operating income 3. What if Reshier Company can only avoid 172 hours of engineering time and 4,850 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. will add $fill in the blank 68f9bb06d038fae_5 to operating income

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

2. 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	$240,000	$550,000	$655,000	$1,445,000
Less variable costs of goods sold	(96,000)	(174,200)	(354,000)	(624,200)
Less commissions	(4,200)	(27,500)	(22,000)	(53,700)
Contribution margin	$139,800	$348,300	$279,000	$767,100
Less common fixed expenses:
Fixed factory overhead				(375,000)
Fixed selling and administrative				(291,000)
Operating income				$101,100

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		$88,000			Engineering hours		710		71	219
Setting up		198,000			Setup hours		12,400		13,200	29,219
Customer service		117,000			Service calls		14,500		1,460	19,219

In addition, Model 1 requires the rental of specialized equipment costing $21,500 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".

	Model 1	Model 2	Model 3	Total
	$- Select -	$- Select -	$- Select -	$- Select -
	- Select -	- Select -	- Select -	- Select -
	- Select -	- Select -	- Select -	- Select -
Contribution margin	$fill in the blank 28fc3a008fdefe6_16	$fill in the blank 28fc3a008fdefe6_17	$fill in the blank 28fc3a008fdefe6_18	$fill in the blank 28fc3a008fdefe6_19
Less traceable fixed expenses:
	- Select -	- Select -	- Select -	- Select -
	- Select -	- Select -	- Select -	- Select -
	- Select -	- Select -	- Select -	- Select -
	- Select -	- Select -	- Select -	- Select -
Product margin	$fill in the blank 28fc3a008fdefe6_40	$fill in the blank 28fc3a008fdefe6_41	$fill in the blank 28fc3a008fdefe6_42	$fill in the blank 28fc3a008fdefe6_43
Less common fixed expenses:
				- Select -
				- Select -
Operating income				$fill in the blank 28fc3a008fdefe6_48

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?

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.

will add $fill in the blank 68f9bb06d038fae_3 to operating income

3. What if Reshier Company can only avoid 172 hours of engineering time and 4,850 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.

will add $fill in the blank 68f9bb06d038fae_5 to operating income

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.