Question

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		$265,000		$574,000		$601,500		$1,440,500
Less variable costs of goods sold		(86,500)		(150,440)		(351,200)		(588,140)
Less commissions		(4,700)		(31,500)		(22,000)		(58,200)
Contribution margin		$173,800		$392,060		$228,300		$794,160
Less common fixed expenses:
Fixed factory overhead								(415,000)
Fixed selling and administrative								(291,000)
Operating income								$88,160

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		$85,000			Engineering hours		740				77				183
Setting up		175,000			Setup hours		12,200				13,400				29,183
Customer service		110,000			Service calls		13,600				1,400				19,183

In addition, Model 1 requires the rental of specialized equipment costing $19,000 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. ( can you please provide detail solutions)

Reshier Company Segmented Income Statement Model 1 Model 2 Model 3 Total $    $    $    $ Contribution margin $   $   $   $   Less traceable fixed expenses: Product margin $   $   $   $   Less common fixed expenses: 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?
- Select your answer -Keeping Model, Dropping Model, Keeping Model 1 or dropping it

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. Select your answer -Keeping Model 1Dropping Model: will add $ _____to operating income

3. What if Reshier Company can only avoid 190 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. Select your answer -Keeping Model or Dropping Model : will add $_______ to operating income

Answer 1

	Model 1	Model 2	Model 3	Total
Sales	$265,000	$574,000	$601,500	$1,440,500
Less variable costs of goods sold	(86,500)	(150,440)	(351,200)	(588,140)
Less commissions	(4,700)	(31,500)	(22,000)	(58,200)
Contribution margin	$173,800	$392,060	$228,300	$794,160
Less traceable fixed expenses:
Engineering	62900 (85000*740/(740+77+183))	6545 (85000*77/(740+77+183))	15555 (85000*183/(740+77+183))	85000
Setting up	38972 (175000*12200/(12200+13400+29183)	42805 (175000*13400/(12200+13400+29183)	93223 (175000*29183/(12200+13400+29183)	175000
Equipment rental	19000			19000
Customer service	43765 (110000*13600/(13600+1400+19183))	4505 (110000*1400/(13600+1400+19183))	61730 (110000*1400/(13600+1400+19183))	110000
Product margin	9163	338205	57792	405160
Less common fixed expenses:
Fixed factory overhead				155000 (415000-85000-175000)
Fixed selling and administrative				181000 (291000-110000)
Operating income				69160

Part 2

Keeping model 1 (as it has positive product margin like other models)

Keeping model 1 will add $9163 to operating income

Part 3

Product margin of model 1 = 173800-((85000*190/(740+77+183)))- (175000*5150/(12200+13400+29183)-19000 = 160199 =

Keeping Model 1: will add $160199 to operating income