Diversified Products, Inc., has recently acquired a small publishing company tha
ID: 2524526 • 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 Total Handy Company Cookbook Guide Speller $ 330,000 $102,000 $162,000 $ 66,000 T rave Sales Expenses Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities 08,000 33,000 63,600 11,400 19,800 39,000 24,000 42,000 14,100 22,500 6.120 9,720 9,600 2.500 2,50 5.400 3,960 5.400 7,500 2,500 33,000 10,200 16,200 6,600 43,800 14,600 14,600 14,600 13,200 4,800 4,080 1,600 6.480 2.64 1,600 1,600 Total expenses 311,100 110,200 146,800 54,100 Net operating income (loss) S 18,900 $ (8,200) S 15,200 11,900 The following additional information is available about the company: a. 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. b. 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 20% of the time to produce cookbooks, 40% of the time to produce travel guides, and 40% of the time to produce handy spellers c. 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 52,800 square feet of space, of which 8,400 square feet is used by the cookbook line, 25,200 square feet by the travel guide line, and 19,200 square feet by the handy speller line d. 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 e. 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 f. All other costs are traceable to the three product lines in the amounts shown on the statement above The management of Diversified Products, Inc., is anxious to improve the publishing company's 6% return on salesExplanation / Answer
2a. I don't agree with the decision to eliminate the cookbook as it's contribution margin is positive and better than travel guide
2.b.1
2.b.2
I don't agree with the decision to allocate available resources on promoting the travel guide as it has the lowest contribution margin ration amongs all 3 books.
Total Cook Travel Handy Sales 330,000 102,000 162,000 66,000 Printing costs Variable 108,000 33,000 63,600 11,400 sales commissions Variable 33,000 10,200 16,200 6,600 Total variable costs 141,000 43,200 79,800 18,000 Contribution margin 189,000 58,800 82,200 48,000 Contribution margin% 57% 58% 51% 73%