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 $245,000 $550,000 $619,500 $1,414,500 Less variable costs of goods sold (95,500) (172,440) (357,600) (625,540) Less commissions (4,000) (26,500) (21,250) (51,750) Contribution margin $145,500 $351,060 $240,650 $737,210 Less common fixed expenses: Fixed factory overhead (380,000) Fixed selling and administrative (299,000) Operating income $58,210 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 $76,000 Engineering hours 710 73 217 Setting up 195,000 Setup hours 12,000 13,400 29,217 Customer service 101,000 Service calls 14,200 1,540 19,217 In addition, Model 1 requires the rental of specialized equipment costing $19,500 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". 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. 3. What if Reshier Company can only avoid 170 hours of engineering time and 5,150 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.
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 | $245,000 | $550,000 | $619,500 | $1,414,500 | |||||
| Less variable costs of goods sold | (95,500) | (172,440) | (357,600) | (625,540) | |||||
| Less commissions | (4,000) | (26,500) | (21,250) | (51,750) | |||||
| Contribution margin | $145,500 | $351,060 | $240,650 | $737,210 | |||||
| Less common fixed expenses: | |||||||||
| Fixed factory |
(380,000) | ||||||||
| Fixed selling and administrative | (299,000) | ||||||||
| Operating income | $58,210 |
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 | $76,000 | Engineering hours | 710 | 73 | 217 | |||||||||||
| Setting up | 195,000 | Setup hours | 12,000 | 13,400 | 29,217 | |||||||||||
| Customer service | 101,000 | Service calls | 14,200 | 1,540 | 19,217 |
In addition, Model 1 requires the rental of specialized equipment costing $19,500 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".
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.
3. What if Reshier Company can only avoid 170 hours of engineering time and 5,150 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.
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