Question

Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale—a cookbook, a travel guide, and a handy speller. Each book sells for $11. The publishing company’s most recent monthly income statement is shown below.

				Product line
	Total Company			Cookbook					Travel Guide			Handy Speller
Sales	$	350,000		$	121,000			$	166,000		$	63,000
Expenses:
Printing costs		117,000			42,000				64,500			10,500
Advertising		37,000			19,000				17,000			1,000
General sales		21,000			7,260				9,960			3,780
Salaries		32,000			17,000				10,500			4,500
Equipment depreciation		10,200			3,400				3,400			3,400
Sales commissions		35,000			12,100				16,600			6,300
General administration		46,500			15,500				15,500			15,500
Warehouse rent		14,000			4,840				6,640			2,520
Depreciation—office facilities		7,500			2,500				2,500			2,500
Total expenses		320,200			123,600				146,600			50,000
Net operating income (loss)	$	29,800		$	(2,600	)		$	19,400		$	13,000

The following additional information is available:

1. Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales.

2. The same equipment is used to produce all three books, so the equipment depreciation cost has been allocated equally among the three product lines. An analysis of the company’s activities indicates that the equipment is used 40% of the time to produce cookbooks, 40% of the time to produce travel guides, and 20% of the time to produce handy spellers.

3. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 56,000 square feet of space, of which 10,200 square feet is used by the cookbook line, 27,000 square feet by the travel guide line, and 18,800 square feet by the handy speller line.

4. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars.

5. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines.

6. All other costs are traceable to the three product lines in the amounts shown on the income statement above.

The management of Diversified Products, Inc., is anxious to improve the publishing company’s 6% return on sales.

Required:

1. Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided.

Answer 1