Cornerstone Exercise 17.2 Keep-Or-Drop Decision, Alternatives, Relevant Costs In

Question

Cornerstone Exercise 17.2
Keep-Or-Drop Decision, Alternatives, Relevant Costs

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

Required:

1. Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins.

   

Reshier Company

Segmented Income Statement

Model 1

Model 2

Model 3

Total

  

$  

$  

$  

$  

  

  

  

  

  

  

  

  

  

  

Contribution margin

$  

$  

$  

$  

Less traceable fixed expenses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Product margin

$  

$  

$  

$  

Less common fixed expenses:

  

  

  

  

Operating income

$  

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1. Review what you have learned about segmented income statements in the chapter. To determine the traceable fixed costs, you will need to compute the activity rates for each activity to assign the costs of the activities to each product. Common fixed expenses are not traceable to the segments. They would remain even if one of the segments were eliminated.

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?
- Select your answer -Keeping Model 1Dropping Model 1Keeping Model 1 or dropping itCorrect 1 of Item 2

Which alternative is more cost effective and by how much? (Assume that any traceable fixed costs can be avoided.)
- Select your answer -Keeping Model 1Dropping Model 1Correct 2 of Item 2  will add $  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?

- Select your answer -Keeping Model 1Dropping Model 1Correct 4 of Item 2  will add $  to operating income

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1. Reformulate the segmented income statement using the additional information on activities. Use a minus sign to indicate any negative margins.

   

Reshier Company

Segmented Income Statement

Model 1

Model 2

Model 3

Total

  

$  

$  

$  

$  

  

  

  

  

  

  

  

  

  

  

Contribution margin

$  

$  

$  

$  

Less traceable fixed expenses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Product margin

$  

$  

$  

$  

Less common fixed expenses:

  

  

  

  

Operating income

$  

Explanation / Answer

Statement of operating income

Particulars Mode-1 Model-2 Model-3 Total Sale $246000 $578000 $634600 $1458600 Less: Variable cost of goods (93500) (164160) (348000) (605660 Less: commissions (5000) (28000) (21750) (54750) Contribution margin $147500 $385840 $264850 $798190 Less: Traceable fixed cost Engineering cost (24000) (2250) (3750) (30000) Set up cost (74400) (75000) (30600) (180000) Customer service (74800) (8250) (26950) (110000) Equipment rent (20000) (20000) Product margin (45700) $300340 $203550 458190 Less: Common fixed expenses 348000 Operating income $1,10,190

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