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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 $20,000 per year. Required: 1. Reformulate the segmented income statement using the additional information on activities. 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? Which alternative is more cost effective and by how much? (Assume that any traceable fixed costs can be avoided.) 3. What if Reshier Company can only avoid 175 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?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 17, Problem 2CE
Textbook Problem
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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.

Chapter 17, Problem 2CE, Reshier Company makes three types of rug shampooers. Model 1 is the basic model rented through , example  1

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:

Chapter 17, Problem 2CE, Reshier Company makes three types of rug shampooers. Model 1 is the basic model rented through , example  2

In addition, Model 1 requires the rental of specialized equipment costing $20,000 per year.

Required:

  1. 1. Reformulate the segmented income statement using the additional information on activities.
  2. 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? Which alternative is more cost effective and by how much? (Assume that any traceable fixed costs can be avoided.)
  3. 3. What if Reshier Company can only avoid 175 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?

1.

To determine

Recalculate the segment income for each model using the additional information on activities.

Explanation of Solution

Tactical decision making: Tactical decision making is a process that the company can choose the correct alternative based on the profitability. In tactical decision making, offer price of a product is compare with the normal selling price and offer price less than the normal selling price of product is considered as the idle capacity for decision making.

Recalculate the segment income for each model using the additional information on activities as follows:

ParticularsModel 1Model 2Model 3Total
Sales$ 246,000$ 578,000$ 634,600$ 1,458,600
Less: Variable cost of goods sold-$ 93,500-$ 164,160-$ 348,000-$ 605,660
Less: Commissions-$ 5,000$ 28,000-$ 21,750$ 1,250
Contribution margin$ 147,500$ 385,840$ 264,850$ 798,190
Less: Traceable fixed expenses:   $ 0
Engineering (2)$ 24,000$ 2,250$ 3,750$ 30,000
Setting up (4)$ 74,400$ 75,000$ 30,600$ 180,000
Equipment rental$ 20,000$ 0$ 0$ 20,000
Customer rental (6)$ 74,800$ 8,250$ 26,950$ 110,000
Production margin-$ 45,700$ 300,340$ 203,550$ 458,190
Less: Common fixed expenses:    
Factory overhead (7)   -$ 168,000
Selling and administrative expense (8)   -$ 180,000
Operating income   $ 110,190

Table (1)

Working note (1):

Calculate the engineering fixed cost per hour.

Engineering fixed cost = Activity costTotal cost driver=$30,000(800+75+175)=$30 per engineering hour

Working note (2):

Calculate the engineering cost for each model.

ParticularsModel 1Model 2Model 3
Engineering fixed cost per hour (A) (1)$30$30$30
Driver usage by each model (B)80075125
Engineering cost$24,000$2,250$3,750

Table (2)

Working note (3):

Calculate the setting up fixed cost per hour.

Setting up fixed cost = Activity costTotal cost driver=$30,000(12,400+12,500+5,100)=$6 per setup hour

Working note (4):

Calculate the setting up cost for each model

2.

To determine

Identify the alternatives of company R and choose the alternative which is more cost effective.

3.

To determine

Explain the manner in which the given changes would affect the alternative, and identify the alternative which is more cost effective.

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Chapter 17 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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