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 $$235,000$ $$590,000$ $$626,500$ $$1,451,500$

Less variable costs of goods sold $(98,500)(169,800)(330,800)(599,100)$

Less commissions $(4,300)(25,000)(23,250)(52,550)$

Contribution margin $$132,200$ $$395,200$ $$272,450$ $$799,850$

Less common fixed expenses:

Fixed factory overhead $(405,000)$

Fixed selling and administrative $(299,000)$

Operating income $$95,850$

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 $$82,000$ Engineering hours $79079131$

Setting up $184,000$ Setup hours $12,80012,20029,131$

Customer service $102,000$ Service calls $14,3001,52019,131$

In addition, Model $1$ requires the rental of specialized equipment costing $$20,500$ per year.

I $am$ needing assistance $in$ calculating problem $3$ Please assist. Thank you. Reshier Company

Segmented Income Statement 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.

$$ will add $

to operating income

What if Reshier Company can only avoid $168$ hours of engineering time and $5,400$ 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 $

$x$ to operating income