90.2K

Verified Solution

Link Copied!

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.

Model1 Model2 Model3 Total

Sales $230,000 $578,000 $633,500 $1,441,500

Less variable costs of goods sold (89,500) (173,320) (362,000) (624,820)

Less commissions (5,000) (37,500) (23,000) (65,500)

Contribution margin $135,500 $367,180 $248,500 $751,180

Less common fixed expenses:

Fixed factory overhead (390,000)

Fixed selling and administrative (295,000)

Operating income $66,180

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 $86,000 Engineering hours 760 79 161

Setting up 187,000 Setup hours 12,900 12,600 29,161

Customer service 114,000 Service calls 14,400 1,560 19,161

In addition, Model 1 requires the rental of specialized equipment costing $18,000 per year.

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 Statemen

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 & Explanation Solved by verified expert

See Answer