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 $12. The publishing company’s most recent monthly income statement is given below: Product Line Total Company Cookbook Travel Guide Handy Speller   Sales $ 355,000 $ 125,000 $ 168,000 $ 62,000   Expenses:        Printing costs 118,000 43,000 66,000 9,000        Advertising 38,000 19,100 17,500 1,400        General sales 21,300 7,500 10,080 3,720        Salaries 33,000 18,000 10,600 4,400        Equipment depreciation 10,500 3,500 3,500 3,500        Sales commissions 35,500 12,500 16,800 6,200        General administration 46,800 15,600 15,600 15,600        Warehouse rent 14,200 5,000 6,720 2,480        Depreciation—office facilities 7,800 2,600 2,600 2,600   Total expenses 325,100 126,800 149,400 48,900   Net operating income (loss) $ 29,900 $ (1,800) $ 18,600 $ 13,100 The following additional information is available about the company: a. 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 statement above. Sales commissions are 10% of sales for any product. b. 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 20% of the time to produce cookbooks, 45% of the time to produce travel guides, and 35% of the time to produce handy spellers. c. 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 56,800 square feet of space, of which 10,400 square feet is used by the cookbook line, 27,200 square feet by the travel guide line, and 19,200 square feet by the handy speller line. d. 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. e. 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. f. All other costs are traceable to the three product lines in the amounts shown on the statement above.      The management of Diversified Products, Inc., is anxious to improve the publishing company's 4% 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. Total Company Cook-Book Travel Guide Handy Speller Variable expenses: Total variable expenses Traceable fixed expenses: Total traceable fixed expenses Common fixed expenses: Total common fixed expenses 2. After seeing the income statement in the main body of the problem, management has decided to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. a. Based on the statement you have prepared, do you agree with the decision to eliminate the cookbook? Yes No b-1. Compute the contribution margin ratio for each product. (Round your answers to the nearest whole percent.) Cook-Book Travel Guide Handy Speller Contribution margin ratio % % % b-2. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide? Yes No

Answer 1

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1. Segmented Income Statement
		Total Company	Cook-Book	Travel Guide	Handy Speller
Sales	A	355000	125000	168000	62000
Variable Expense:
Printing Cost		118000	43000	66000	9000
Sales Commission		35500	12500	16800	6200
Total Variable Expense	B	153500	55500	82800	15200
Contribution Margin	C=A-B	201500	69500	85200	46800
Traceable Fixed Expenses:
Advertising		38000	19100	17500	1400
Salaries		33000	18000	10600	4400
Equipment Depreciation		10500	3500	3500	3500
Warehouse Rent		14200	5000	6720	2480
Total Traceable Fixed Expense	D	95700	45600	38320	11780
Product Line Segment Margin	E=C-D	105800	23900	46880	35020
Common Fixed Expense:
General Sale		21300	7500	10080	3720
Dep-Office Facilities		46800	15600	15600	15600
General Administration		7800	2600	2600	2600
Total Common Fixed Expense	F	75900
Net Operating Income	E-F	29900
2a. NO
Since cookbook has profit of 23900 as product line segment margin.
2b1.
	Cook-Book	Travel Guide	Handy Speller
Sales A	125000	168000	62000
Contribution Margin B	69500	85200	46800
Contribution Margin Ratio B/A	56%	51%	75%
2b2.	No Since Contribution Margin in lowest