ornerstone Exercise 17.2 (Algorithmic) Keep-Or-Drop Decision, Alternatives, Rele

Question

ornerstone Exercise 17.2 (Algorithmic)
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.

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:

In addition, Model 1 requires the rental of specialized equipment costing $19,500 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.

   

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

Model 1 Model 2 Model 3 Total Sales $270,000 $570,000 $641,000 $1,481,000 Less variable costs of goods sold (92,500) (163,640) (330,000) (586,140) Less commissions (4,500) (36,000) (19,750) (60,250)      Contribution margin $173,000 $370,360 $291,250 $834,610 Less common fixed expenses:      Fixed factory overhead (395,000)      Fixed selling and administrative (311,000) Operating income $128,610

Explanation / Answer

Thus the adoption of of activity based costing system has led to a more realistic income statement. Moreover the operating income has also increased mrginally.

Ans 2. From the above it is clear that none of the products are having negative product margin and hence not to be discontinued..

Ans. Calculation of activity cost driver rate Particulars Cost ($) Total of driver Driver unit Activity cost driver rate ($) Engineering 79000 1000 Engineering hours 79 Setting up 195000 53929 Set up hours 3.62 Customer Service 101000 35029 Service calls 2.88 375000 Revised segmented income statement using activity based costing Particulars Model 1 ($) Model 2 ($) Model 3 ($) Total Sales 270000 570000 641000 1481000 (-) Variable cost of goods sold -92500 -163640 -330000 -586140 (-) Commissions -4500 -36000 -19750 -60250 Contribution Margin 173000 370360 291250 834610 (-) Traceable fixed exxpenses Engineering -63200 -5609 -10191 -79000 Set up -46283.08 -43390.38 -105326.54 -195000 Customer Service -41519.88 -4324.99 -55155.13 -101000 Rental of specialized equipment -19500 -19500 Product margin 2497.04 317035.63 120577.33 440110 (-) Common fixed expenses Fixed sales and admin expenses -311000 Operating income 129110

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