Cornerstone Exercise 17.2 (Algorithmic) Keep-Or-Drop Decision, Alternatives, Rel
ID: 2535211 • Letter: C
Question
Cornerstone 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
Which alternative is more cost effective and by how much? (Assume that any traceable fixed costs can be avoided.) Do NOT round interim calculations and, if required, round your answer to the nearest dollar.
- 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 162 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? Do NOT round interim calculations and, if required, round your answer to the nearest dollar.
- Select your answer -Keeping Model 1Dropping Model 1Correct 4 of Item 2 will add $ to operating income
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2. Do any of the products have a negative product margin?
Review what you have learned in the chapter. What is the amount of the product margin?
3. Compute new activity rates for each activity to assign the costs of the activities to the product in question. What is the new product margin?
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001_Cornerstone Exercise 17.02 Algorithmic
Cengage Learning
Cengage Technical Support
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 $128,610Explanation / Answer
Solution 1: Segmented Income Statement for Reshier Company as whole will look like below:
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 Traceable Fixed Expenses
Engineering Expenses
151,003
53,324
170,673
375,000
Special Equipment
19,500
19,500
Product Margin
2,497
317,036
120,577
440,110
Less common fixed expenses:
Fixed factory overhead
-500
Fixed selling and administrative
-311,000
Operating income
128,610
Working Note:
Reshier Company
Fixed Cost Allocation
Particulars
Total Expense
Basis of Allocation
Total Allocation units
Ratio of Allocation
Model 1
Model 2
Model 3
Engineering
79,000
No. of Engineering Hours
1000
800:71:129
63,200
5,609
10,191
Setting up
195,000
No. of Set up hours
53929
12800:12000:29129
46,283
43,390
105,327
Customer Service
101,000
No. of Service calls
35029
14400:1500:19129
41,520
4,325
55,155
Total
375,000
151,003
53,324
170,673
Solution 2: All the products Margin are positive as per the statement. If the company have to drop a model mandatorily, it can drop Model A since it incurs the minimum product margin.
None of the product is having negative product Margin.
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 Traceable Fixed Expenses
Engineering Expenses
151,003
53,324
170,673
375,000
Special Equipment
19,500
19,500
Product Margin
2,497
317,036
120,577
440,110
Less common fixed expenses:
Fixed factory overhead
-500
Fixed selling and administrative
-311,000
Operating income
128,610