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	$240,000	$590,000	$644,500	$1,474,500
Less variable costs of goods sold	(87,000)	(173,760)	(356,800)	(617,560)
Less commissions	(4,700)	(35,000)	(18,750)	(58,450)
Contribution margin	$148,300	$381,240	$268,950	$798,490
Less common fixed expenses:
Fixed factory overhead				(420,000)
Fixed selling and administrative				(283,000)
Operating income				$95,490

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	$88,000	Engineering hours	780	72	148
Setting up	188,000	Setup hours	12,500	13,400	29,148
Customer service	110,000	Service calls	13,900	1,600	19,148

In addition, Model 1 requires the rental of specialized equipment costing $25,000 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				$______

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?

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.

Dropping Model 1 will add $_______ to operating income

3. What if Reshier Company can only avoid 172 hours of engineering time and 5,350 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. Keeping Model 1 will add $______ to operating income