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		$245,000		$594,000		$640,500		$1,479,500
Less variable costs of goods sold		(99,000)		(166,720)		(346,000)		(611,720)
Less commissions		(4,800)		(29,000)		(22,750)		(56,550)
Contribution margin		$141,200		$398,280		$271,750		$811,230
Less common fixed expenses:
Fixed factory overhead								(420,000)
Fixed selling and administrative								(307,000)
Operating income								$84,230

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		$87,000			Engineering hours		740				73				187
Setting up		180,000			Setup hours		12,800				12,000				29,187
Customer service		114,000			Service calls		13,200				1,500				19,187

In addition, Model 1 requires the rental of specialized equipment costing $23,000 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				$

Answer 1

	Model 1	Model 2		Model 3	Total
Sales	$245,000.00	$594,000.00		$640,500.00	$1,479,500.00
Less:Variable COGS	$99,000.00	$166,720.00		$346,000.00	$611,720.00
Less:commissions	$4,800.00	$29,000.00		$22,750.00	$56,550.00
Contribution margin	$141,200.00	$398,280.00		$271,750.00	$811,230.00
Less:Traceabe fixed expenses
Engineering	$64,380.00	$6,351.00		$16,269.00	$87,000.00
Settng up	$42,676.94	$40,009.63		$97,313.43	$180,000.00
Customer service	$44,406.41	$5,046.18		$64,547.41	$114,000.00
Equipment rental	$23,000.00	$0.00		$0.00	$23,000.00
Total traceabe fixed expenses	$174,463.35	$51,406.81		$178,129.83	$404,000.00
Product margin	-$33,263.35	$346,873.19		$93,620.17	$407,230.00
Less:Common fixed expenses
Factory overhead (420000-87000-180000-23000)					-$130,000.00
Selling and admin expenses ( 307000-114000)					-$193,000.00
Operating income					$84,230.00

				Model-1		Model-2		Model-3
Activity	Estimated Overhead	Activity Pool	Activity Rate	No. of Driver	Allocated OH	No. of Driver	Allocated OH	No. of Driver	Allocated OH
Engineering	$87,000	1000	$87.00	740	$64,380.00	73	$6,351.00	187	$16,269.00
Setting Up	$180,000	53987	$3.33	12800	$42,676.94	12000	$40,009.63	29187	$97,313.43
Customer Service	$114,000	33887	$3.36	13200	$44,406.41	1500	$5,046.18	19187	$64,547.41