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 $225,000 $590,000 $648,500 $1,463,500 Less variable costs of goods sold (93,500) (168,040) (354,000) (615,540) Less commissions (4,000) (33,500) (23,000) (60,500) Contribution margin $127,500 $388,460 $271,500 $787,460 Less common fixed expenses: Fixed factory overhead (390,000) Fixed selling and administrative (283,000) Operating income $114,460 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 79 211 Setting up 178,000 Setup hours 12,700 12,200 29,211 Customer service 102,000 Service calls 14,200 1,540 19,211 In addition, Model 1 requires the rental of specialized equipment costing $22,000 per year. 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. 3. What if Reshier Company can only avoid 180 hours of engineering time and 5,350 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 $225,000 $590,000 $648,500 $1,463,500 Less variable costs of goods sold (93,500) (168,040) (354,000) (615,540) Less commissions (4,000) (33,500) (23,000) (60,500) Contribution margin $127,500 $388,460 $271,500 $787,460 Less common fixed expenses: Fixed factory overhead (390,000) Fixed selling and administrative (283,000) Operating income $114,460 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 79 211 Setting up 178,000 Setup hours 12,700 12,200 29,211 Customer service 102,000 Service calls 14,200 1,540 19,211 In addition, Model 1 requires the rental of specialized equipment costing $22,000 per year. 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. 3. What if Reshier Company can only avoid 180 hours of engineering time and 5,350 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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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	Model 1	Model 2	Model 3	Total
Sales	$225,000	$590,000	$648,500	$1,463,500
Less variable costs of goods sold	(93,500)	(168,040)	(354,000)	(615,540)
Less commissions	(4,000)	(33,500)	(23,000)	(60,500)
Contribution margin	$127,500	$388,460	$271,500	$787,460
Less common fixed expenses:
Fixed factory overhead				(390,000)
Fixed selling and administrative				(283,000)
Operating income				$114,460

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		79	211
Setting up		178,000			Setup hours		12,700		12,200	29,211
Customer service		102,000			Service calls		14,200		1,540	19,211

In addition, Model 1 requires the rental of specialized equipment costing $22,000 per year.

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.

3. What if Reshier Company can only avoid 180 hours of engineering time and 5,350 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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