Diversified Products, Inc., has recently acquired a small publishing company tha
ID: 2484182 • 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 $14. The publishing company’s most recent monthly income statement is given below:
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 58,400 square feet of space, of which 10,800 square feet is used by the cookbook line, 27,600 square feet by the travel guide line, and 20,000 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 6% 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.
Based on the statement you have prepared, do you agree with the decision to eliminate the cookbook? (Yes/No question)
Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide? (Yes/No question)
The following additional information is available about the company:Explanation / Answer
Total Company Cook Book Travel Guide Handy speller Working Sales S $365,000 $135,000 $172,000 $58,000 Less: variable Expenses Printing cost $120,000 45000 70100 4900 Sales Commission $36,500 13500 17200 5800 Total variable Expenses $156,500 $58,500 $87,300 $10,700 Contribution margin C $208,500 $76,500 $84,700 $47,300 Less: Traceable Fixed Expenses Cook Book Equipment depreciation in ratio of 30:55:15 11100 3330 6105 1665 11100/100*30=3330 Warehouse Rent in ratio of 108:276:200 14600 2700 6900 5000 14600/584*108=2700 Salaries 35000 20000 10800 4200 Advertising 46000 25000 18500 2500 Total Traceable fixed expneses 106700 51030 42305 13365 Product Wise Profit margin $101,800 $25,470 $42,395 $33,935 Common Fixed Expenses General sales Cost 21900 General depreciation Cost 45000 Depreciation on Office Facilities 8400 Total Common Fixed Expenses 75300 Net Loss $26,500 Ans 2 a No as the product margin is $25470 2 B-1 Cook Book Travel Guide Handy speller Contribution Margin ratio Contribution/Sales C/S 57 49 82 % 0.57 0.49 0.82 Ratio 2 b 2 No as cook book has better contribution Margin ratio thanTravel Guide