Diversified Products, Inc., has recently acquired a small publishing company tha
ID: 2575171 • 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 TravelHandy Company Cookbook Guide Speller $ 340,000 $111,000 $162,000 $67,000 Sales Expenses Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities 115,000 40,000 64,300 10,700 35,000 14,800 16,0004,200 4,020 30,000 15,000 10,300 4,700 3,200 6,700 15,300 15,300 2,680 2,300 20,400 6,660 9,720 3,200 16,200 9,600 3,200 34,000 11,100 45,90015,300 4,440 2,300 13,600 6,900 6,480 2,300 lotal expenses 310,400 112,800 143,80053,800 Net operating income (loss) $ 29,600 $ (1,800) $ 18,200 $ 13,200 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 30% of the time to produce cookbooks, 55% of the time to produce travel guides, and 15% 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 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 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 4% return on salesExplanation / Answer
1,2b-1:
2a. Since cookbook is providing positive contribution to common fixed expenses, it is not advised to eliminate it.
2 b-2:
Travel guide contribution to common fixed expenses is not the highest among three products, hence not agreed to that decision
Ref Variable Costing Income Statement Total company Cook-Book Travel guide Handy speller A Sales 340000 111000 162000 67000 Variable expenses: Printing costs 115000 40000 64300 10700 Sales commission 34000 11100 16200 6700 B Total variable expenses 149000 51100 80500 17400 C=A-B Contribution 191000 59900 81500 49600 Traceble fixed costs: Equipment depreciation 9600 2880 5280 1440 [9600*30%] [9600*55%] [9600*15%] Warehouse rent 13600 2450 6650 4500 [9800*3/12] [26600*3/12] [8000*3/12] Advertising 35000 14800 16000 4200 Salaries 30000 15000 10300 4700 D Total traceblefixed expenses 88200 35130 38230 14840 E=C-D Contribution to common fixed expense 102800 24770 43270 34760 Commom fixed expenses: General sales 20400 Depreciation- office facilities 6900 General administration 45900 F Total common fixed expenses 73200 G=E-F Net income 29600 F=C/A Contribution margin ratio 22.32% 26.71% 51.88%