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 Less variable costs of goods sold Less commissions $225,000 (99,000) (5,600) $578,000 (162,760) (36,500) $378,740 $618,500 (349,200) (21,000) $248,300 $1,421,500 (610,960) (63,100) Contribution margin $120,400 $747,440 Less common fixed expenses: Fixed factory overhead (375,000) (287,000) Fixed selling and administrative Operating income $85,440 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 $77,000 Engineering hours 710 74 216

Answer 1

Answer: 1.)

Reshier Company Segmented Income Statement
	Model 1	Model 2	Model 3	Total
Sales	225,000	578,000	618,500	1,421,500
Less: Variable cost of goods sold	(99,000)	(162,760)	(349,200)	(610,960)
Less: Commissions	(5,600)	(36,500)	(21,000)	(63,100)
Contribution margin	120,400	378,740	248,300	747,440
Less: Traceable Fixed Expenses: (Working-1)
Engineering	(54,670)	(5,698)	(16,632)	(77,000)
Setting up	(46,997)	(43,382)	(105,621)	(196,000)
Equipment rental	(24,500)			(24,500)
Customer service	(41,500)	(4,427)	(59,073)	(105,000)
Product margin	(47,267)	325,233	66,974	344,940
Less: Common Fixed Expenses:
Factory overhead (Working-2)				(77,500)
Selling and administrative expense (Working-2)				(182,000)
Operating income				85,440

Working-1

Calculation of Traceable Fixed expenses

Activity	Activity Cost	Driver Usage	Activity Rate
	A	Model 1	Model 2	Model 3	Total (B)	A / B
Engineering	77,000	710	74	216	1,000	77
Setting up	196,000	13,000	12,000	29,216	54,216	3.62
Customer Service	105,000	13,500	1,440	19,216	34,156	3.04

Allocation of Cost

	Engineering	Setting up	Customer Service
Model 1	77*710	54,670	3.62*13,000	46,997	3.07*13,500	41,500
Model 2	77*74	5,698	3.62*12,000	43,382	3.07*1,440	4,427
Model 3	77*216	16,632	3.62*29,216	105,621	3.07*19,216	59,073
Total		77,000		196,000		105,000

Working- 2

	Factory overhead	Selling and administrative expense
Total Fixed Expense	375,000	287,000
Less: Equipment Rental	(24,500)
Less: Traceable	(273,000)	(105,000)
Common Fixed Expense	77,500	182,000

2.) Since, Model 1 has negative product margin of $47,267, dropping it will be beneficialy for company.

Dropping it will increase net income of company by $47,267.

3.)

Reshier Company Segmented Income Statement
	Model 1	Model 2	Model 3	Total
Sales	225,000	578,000	618,500	1,421,500
Less: Variable cost of goods sold	(99,000)	(162,760)	(349,200)	(610,960)
Less: Commissions	(5,600)	(36,500)	(21,000)	(63,100)
Contribution margin	120,400	378,740	248,300	747,440
Less: Traceable Fixed Expenses: (Working-1)
Engineering (77*190)	(14,630)	(5,698)	(16,632)	(36,960)
Setting up (3.62*4,900)	(17,714)	(43,382)	(105,621)	(166,717)
Equipment rental	(24,500)			(24,500)
Customer service	(41,500)	(4,427)	(59,073)	(105,000)
Product margin	22,056	325,233	66,974	414,263

Keeping Model 1 will add $22,056 to Company Income.

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