Diversified Products, Inc., has recently acquired a small publishing company tha
ID: 2581210 • 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 $13. The publishing company’s most recent monthly income statement is given below:
Product Line
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 25% of the time to produce cookbooks, 50% of the time to produce travel guides, and 25% 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 57,600 square feet of space, of which 10,600 square feet is used by the cookbook line, 27,400 square feet by the travel guide line, and 19,600 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 5% 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.
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 $13. The publishing company’s most recent monthly income statement is given below:
Explanation / Answer
Contribution format segmented Income Statement Cookbook Travel guide Handy Speller Total Sales $ 130,000 $ 170,000 $ 60,000 $ 360,000 Less: Variable Expenses Printing Cost $ 44,000 $ 70,000 $ 5,000 $ 119,000 Sales Commission $ 13,000 $ 17,000 $ 6,000 $ 36,000 Contribution Margin $ 73,000 $ 83,000 $ 49,000 $ 205,000 Less: Direct Fixed Expenses Advertising $ 21,000 $ 18,000 $ 3,000 $ 42,000 General Sales $ 7,800 $ 10,200 $ 3,600 $ 21,600 Salaries $ 19,000 $ 10,700 $ 4,300 $ 34,000 Equipment Depreciation $ 2,700 $ 5,400 $ 2,700 $ 10,800 General Administration $ 15,700 $ 15,700 $ 15,700 $ 47,100 Warehouse Rent $ 2,650 $ 6,850 $ 4,900 $ 14,400 Depreciation-office facilities $ 2,700 $ 2,700 $ 2,700 $ 8,100 Net Income $ 1,450 $ 13,450 $ 12,100 $ 27,000 B. Calculation of Contribition Margin Ratio Contribution Margin Ratio = Ne Sales - Variable Cost Cookbook Travel guide Handy Speller Total Sales $ 130,000 $ 170,000 $ 60,000 $ 360,000 Less: Variable Expenses Printing Cost $ 44,000 $ 70,000 $ 5,000 $ 119,000 Sales Commission $ 13,000 $ 17,000 $ 6,000 $ 36,000 Contribution Margin Ratio $ 73,000 $ 83,000 $ 49,000 $ 205,000