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   $235,000   $590,000   $658,500   $1,483,500   Less variable costs of goods sold   (91,500)   (166,280)   (356,000)   (613,780)   Less commissions   (5,700)   (40,000)   (21,750)   (67,450)        Contribution margin   $137,800   $383,720   $280,750   $802,270   Less common fixed expenses:                   Fixed factory overhead               (385,000)    Fixed selling and administrative               (307,000)   Operating income               $110,270   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 $86,000   Engineering hours 750   71 179                   Setting up $196,000   Setup hours 12,100   13,200 29,179                   Customer service $100,000   Service calls 13,400   1,480 19,179                   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".   Reshier Company Segmented Income Statement   Model 1 Model 2 Model 3 Total 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          Selling and admin. expense          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? 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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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   $235,000   $590,000   $658,500   $1,483,500  
Less variable costs of goods sold   (91,500)   (166,280)   (356,000)   (613,780)  
Less commissions   (5,700)   (40,000)   (21,750)   (67,450)  
     Contribution margin   $137,800   $383,720   $280,750   $802,270  
Less common fixed expenses:                  
Fixed factory overhead               (385,000)  
 Fixed selling and administrative               (307,000)  
Operating income               $110,270  

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 $86,000   Engineering hours 750   71 179                  
Setting up $196,000   Setup hours 12,100   13,200 29,179                  
Customer service $100,000   Service calls 13,400   1,480 19,179                  

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".

 
Reshier Company
Segmented Income Statement
  Model 1 Model 2 Model 3 Total
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         
Selling and admin. expense         
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?

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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