akes 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 $240,0
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 |
(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.
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 to operating income
4. Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs
Betram Chemicals Company processes a number of chemical compounds used in producing industrial cleaning products. One compound is decomposed into two chemicals: anderine and dofinol. The cost of processing one batch of compound is $76,500, and the result is 5,900 gallons of anderine and 7,900 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $9.00 per gallon and the dofinol for $6.00 per gallon. Alternatively, the anderine can be processed further at a cost of $8.10 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $60.
2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 450 gallons of anderine that undergo further processing require 17 more purchase orders at $9 each and 17 more quality inspection hours at $26 each. Which alternative would be better and by how much?
NOTE: Round interim calculations and your final answer to the nearest cent.
by $fill in the blank 4
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