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 $3$TotalSales$$246,000$$$578,000$$$634,600$$$1,458,600$Less variable costs of goods sold$(93,500)(164,160)(348,000)(605,660)$Less commissions$(5,000)(28,000)(21,750)(54,750)$ Contribution margin$$147,500$$$385,840$$$264,850$$$798,190$Less common fixed expenses:$$ Fixed factory overhead$(398,000)$ Fixed selling and administrative$(290,000)$Operating income$$110,190$

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 ModelActivityActivity CostActivity DriverModel $1$Model $2$Model $3$Engineering$$30,000$Engineering hours$80075125$Setting up$180,000$Setup hours$12,40012,5005,100$Customer service$110,000$Service calls$13,6001,5004,900$

In addition, Model $1$ requires the rental of specialized equipment costing $$20,000$ per year.

Required:

Question Content Area

$1.$ Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins. If amount box does not require an entry, leave it blank or enter $"0".$

blank

Reshier Company

Segmented Income StatementModel $1$Model $2$Model $3$Total

CashCommissionsCost of goods soldNet incomeSalesSales

$Sales$Sales$Sales$Sales

Less customer servicesLess engineeringLess factory overheadLess variable cost of goods soldLess setting upLess variable cost of goods sold

Less variable cost of goods soldLess variable cost of goods soldLess variable cost of goods soldLess variable cost of goods sold

Less customer servicesLess engineeringLess factory overheadLess commissionsLess setting upLess commissions

Less commissionsLess commissionsLess commissionsLess commissionsContribution margin$fill in the blank $65$b$9$d$000$efe$6020\_16$$fill in the blank $65$b$9$d$000$efe$6020\_17$$fill in the blank $65$b$9$d$000$efe$6020\_18$$fill in the blank $65$b$9$d$000$efe$6020\_19$Less traceable fixed expenses:

CommissionsCost of goods soldEngineeringFactory overheadSelling and admin. expenseEngineering

EngineeringEngineeringEngineeringEngineering

CommissionsCost of goods soldFactory overheadSelling and admin. expenseSetting upSetting up

Setting upSetting upSetting upSetting up

CommissionsCost of goods soldEquipment rentalFactory overheadSelling and admin. expenseEquipment rental

Equipment rentalEquipment rentalEquipment rentalEquipment rental

CommissionsCost of goods soldCustomer serviceFactory overheadSelling and admin. expenseCustomer service

Customer serviceCustomer serviceCustomer serviceCustomer serviceProduct margin$fill in the blank $65$b$9$d$000$efe$6020\_40$$fill in the blank $65$b$9$d$000$efe$6020\_41$$fill in the blank $65$b$9$d$000$efe$6020\_42$$fill in the blank $65$b$9$d$000$efe$6020\_43$Less common fixed expenses:

CommissionsCost of goods soldCustomer servicesEngineeringFactory overhead

$-$ Select $-$

CommissionsCost of goods soldCustomer servicesEngineeringSelling and admin. expense

$-$ Select $-$Operating income$fill in the blank $65$b$9$d$000$efe$6020\_48$

Question Content Area

$2.$ 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 $1$Dropping Model $1$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.$)$

Keeping Model $1$Dropping Model $1$

will add $fill in the blank ff$57$f$1$f$7$b$05$efcf$\_3$ to operating income

$3.$ What if Reshier Company can only avoid $175$ hours of engineering time and $5,000$ 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?

Keeping Model $1$Dropping Model $1$

will add $fill in the blank ff$57$f$1$f$7$b$05$efcf$\_5$ to operating income