Diversified Products, Inc., has recently aoquired a small publishing company tha
ID: 2584932 • Letter: D
Question
Diversified Products, Inc., has recently aoquired a small publishing company that offers three books for sale-a cookbook, a travel guide, and a handy speller. Each book sells for $14. The publishing company's most recent monthly income statement is given below: Product Line Travel Handy Company Cookbook Guide Speller $365,000 $135,000 $172,000 $58,000 Printing costs 120,000 45,000 70,100 4,900 46,000 25,000 18,500 2,500 General sales 21,900 8,100 10,320 3,480 35,000 20,000 10,800 4,200 Equipment00 11,100 3,700 3,700 3,700 36,500 13,500 17,200 5,800 45,000 ,000 15,000 15,000 Warehouse rent 14,600 5,400 6,880 2,320 8,400 2,800 2,800 2,800 Depreciabon_ office facilities Total expenses 338,500 138,500 155,300 44,700 Net operating income (loss) $ 26,500 (3,500) 16,700 $13,300 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 S3 per square foot per year. The warehouse contains 58,400 square feet of by the cookbook line, 27,600 square feet by the travel guide line, and 20,000 square feet by the handy speller line space, of which 1 10,800 square feet is used d.The general sales cost above includes the salary of the sales manager and e.The general administration cost and depreciation of office facilities both f. All other costs are traceable to the three product lines in the amounts 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. relate to administration of the company as a whole. These costs have been allocated equally to the three product lines. shown on the statement above. The management of Diversified Products, Inc., is anxious to improve the publishing company's 6% return on sales. 1. 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.Explanation / Answer
Answer:
1
new contribution format segmented income statement for the month
Total
Company
Cook Book
Travel Guide
Handy speller
Sales
$365,000
$135,000
$172,000
$58,000
variable Expenses
Printing cost
$120,000
45000
70100
4900
Sales Commission
$36,500
13500
17200
5800
Total variable Expenses
$156,500
$58,500
$87,300
$10,700
Contribution margin
$208,500
$76,500
$84,700
$47,300
Traceable Fixed Expenses
Equipment depreciation in ratio of
Ratio = (30:55:15) W.N.1
11100
3330
6105
1665
Warehouse Rent in ratio of
Ratio=(108:276:200)
14600
2700
6900
5000
Salaries
35000
20000
10800
4200
Advertising
46000
25000
18500
2500
Total Traceable fixed expenses
106700
51030
42305
13365
Product Wise Profit margin
$101,800
$25,470
$42,395
$33,935
Common Fixed Expenses
General sales Cost
21900
General depreciation Cost
45000
Depreciation on Office Facilities
8400
Total Common Fixed Expenses
75300
Net Loss
$26,500
Working notes for the answer:
1
W.N.1
11100/100*30=3330
11100/100*55=6105
11100/100*15=1665
2
W.N.2
14600/584*108=2700
14600/584*276=6900
14600/584*200=5000
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2
Based on the statement you have prepared, do you agree with the decision to eliminate the cookbook
Answer: NO
Explanation
Because segment margin is $25,470
___________________________________________________________
3
Contribution margin ratio of each product
Cook Book
Travel Guide
Handy speller
sales
135000
172000
58000
Less: variable cost
$58,500
$87,300
$10,700
Contribution margin
$76,500
$84,700
$47,300
Contribution margin Ratio
= contribution /sales
57%
49%
82%
______________________________________________________________
4
Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide?
Answer: NO
Explanation
Because Contribution margin Ratio of Travel Guide is lower
Total
Company
Cook Book
Travel Guide
Handy speller
Sales
$365,000
$135,000
$172,000
$58,000
variable Expenses
Printing cost
$120,000
45000
70100
4900
Sales Commission
$36,500
13500
17200
5800
Total variable Expenses
$156,500
$58,500
$87,300
$10,700
Contribution margin
$208,500
$76,500
$84,700
$47,300
Traceable Fixed Expenses
Equipment depreciation in ratio of
Ratio = (30:55:15) W.N.1
11100
3330
6105
1665
Warehouse Rent in ratio of
Ratio=(108:276:200)
14600
2700
6900
5000
Salaries
35000
20000
10800
4200
Advertising
46000
25000
18500
2500
Total Traceable fixed expenses
106700
51030
42305
13365
Product Wise Profit margin
$101,800
$25,470
$42,395
$33,935
Common Fixed Expenses
General sales Cost
21900
General depreciation Cost
45000
Depreciation on Office Facilities
8400
Total Common Fixed Expenses
75300
Net Loss
$26,500