Diversified Products, Inc., has recently acquired a small publishing company tha
ID: 2566100 • 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 $10. The publishing company's most recent monthly income statement is given below: Product Line Total Travel Handy Company Cookbook Guide Speller Sales $ 335,000 $104,000 $ 164,000 $ 67,000 Expenses: Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation—office facilities 109,000 43,000 20,100 40,000 7,800 33,500 44,100 13,400 5,100 34,000 14,200 6,240 25,000 2,600 10,400 14,700 4,160 1,700 63,700 23,000 9,840 9,700 2,600 16,400 14,700 6,560 1,700 11,300 5,800 4,020 5,300 2,600 6,700 14,700 2,680 1,700 Total expenses 316,000 113,000 148,200 54,800 Net operating income (loss) $ 19,000 $ (9,000) $ 15,800 $ 12,200 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 25% of the time to produce cookbooks, 45% of the time to produce travel guides, and 30% 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 53,600 square feet of space, of which 8,600 square feet is used by the cookbook line, 25,400 square feet by the travel guide line, and 19,600 square feet by the handy speller line.Explanation / Answer
Answer 1. Total Company Cook-Book Travel Guide Handy Speller Sales 335,000 104,000 164,000 67,000 Variable Expenses: Printing Cost 109,000 34,000 63,700 11,300 Sales Commission - 10% of Sales 33,500 10,400 16,400 6,700 Total Variable Expenses 142,500 44,400 80,100 18,000 Contribution Margin 192,500 59,600 83,900 49,000 Traceable Fixed Expenses Advertising 43,000 14,200 23,000 5,800 Salaries 40,000 25,000 9,700 5,300 Equipment Depreciation (25%:45%:30%) 7,800 1,950 3,510 2,340 Warehouse Rent 13,400 2,150 6,350 4,900 Total Traceable Fixed Expenses 104,200 43,300 42,560 18,340 Product Line Segment Margin 88,300 16,300 41,340 30,660 Common Fixed Expenses: General Sales 20,100 General Administration 44,100 Depreciation - Office Facilities 5,100 Total Common Fixed Expenses 69,300 Net Operating Income (Loss) 19,000 Answer 2-a. No, Cook Book Line should not be eliminated, as Cook Book is covering all its cost and generating $16,300 segment profit toards covering the common costs and profit. Answer 2-b-1. Contribution Margin Ratio = Contribution / Sales Cook-Book Travel Guide Handy Speller Contribution Margin 59,600 83,900 49,000 Sales 104,000 164,000 67,000 Contribution Margin Ratio 57.31% 51.16% 73.13% Answer 2-b-2. It is unwise to focus all the available resources on promting the Travel Guide. The Company is already spending more on advertisng of this product and also it has the lowest Contribution Margin Ratio.