Diversified Products, Inc., has recently acquired a small publishing company tha
ID: 2478849 • Letter: D
Question
Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale—a cookbook, a travel guide, and a handy speller. Each book sells for $16. The publishing company’s most recent monthly income statement is given below:
Product Line
Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the statement above. Sales commissions are 10% of sales for any product.
The same equipment is used to produce all three books, so the equipment depreciation cost has been allocated equally among the three product lines. An analysis of the company’s activities indicates that the equipment is used 30% of the time to produce cookbooks, 55% of the time to produce travel guides, and 15% of the time to produce handy spellers.
The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 54,400 square feet of space, of which 9,800 square feet is used by the cookbook line, 26,600 square feet by the travel guide line, and 18,000 square feet by the handy speller line.
The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars.
The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines.
The management of Diversified Products, Inc., is anxious to improve the publishing company's 4% return on sales.
Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided.
After seeing the income statement in the main body of the problem, management has decided to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide.
Compute the contribution margin ratio for each product. (Round your answers to the nearest whole percent.)
Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide?
Product Line
TotalCompany Cookbook Travel
Guide Handy
Speller Sales $ 340,000 $ 111,000 $ 162,000 $ 67,000 Expenses: Printing costs 115,000 40,000 64,300 10,700 Advertising 35,000 14,800 16,000 4,200 General sales 20,400 6,660 9,720 4,020 Salaries 30,000 15,000 10,300 4,700 Equipment depreciation 9,600 3,200 3,200 3,200 Sales commissions 34,000 11,100 16,200 6,700 General administration 45,900 15,300 15,300 15,300 Warehouse rent 13,600 4,440 6,480 2,680 Depreciation—office facilities 6,900 2,300 2,300 2,300 Total expenses 310,400 112,800 143,800 53,800 Net operating income (loss) $ 29,600 $ (1,800) $ 18,200 $ 13,200
Explanation / Answer
a. Based on the statement you have prepared, do you agree with the decision to eliminate the cookbook?
NO cook book is provding profit it should not be eliminated
b-1 contribution margin ratio for each product
contribution / sale * 100 53.96 % 50.30% 74.03% 56.17%
cook book travel handy speller total Sale 111000 162000 67000 340000 vaiable Expense printing cost 40000 64300 10700 115000 sale commision 11100 16200 6700 34000 fixed cost adversiment 14800 16000 4200 35000 equipment dep 2880 5280 1440 9600 warehouse 2450 6650 4500 13600 general sale 6660 9720 4020 20400 gen administrative 15300 15300 15300 45900 dep office 2300 2300 2300 6900 salary 15000 10300 4700 30000 operating income 510 15950 13140 29600