Diversified Products, Inc., has recently acquired a smallpublishing company that offers three books for salea cookbook, atravel guide, and a handy speller. Each book sells for $10. Thepublishing companys most recent monthly income statement is givenbelow:
Product Line
Total
Company Cookbook Travel
Guide Handy
Speller Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000 Expenses: Printing costs 102,000 27,000 63,000 12,000 Advertising 36,000 13,500 19,500 3,000 General sales 18,000 5,400 9,000 3,600 Salaries 33,000 18,000 9,000 6,000 Equipmentdepreciation 9,000 3,000 3,000 3,000 Sales commissions 30,000 9,000 15,000 6,000 Generaladministration 42,000 14,000 14,000 14,000 Warehouse rent 12,000 3,600 6,000 2,400 Depreciationofficefacilities 3,000 1,000 1,000 1,000 Total expenses 285,000 94,500 139,500 51,000 Net operating income(loss) $ 15,000 $ (4,500) $ 10,500 $ 9,000
The followingadditional information is available about the company:
a. Only printing costs and sales commissions are variable; allother costs are fixed. The printing costs (which include materials,labor, and variable overhead) are traceable to the three productlines as shown in the statement above. Sales commissions are 10% ofsales for any product.
b. The same equipment is used to produce all three books, so theequipment depreciation cost has been allocated equally among thethree product lines. An analysis of the companys activitiesindicates that the equipment is used 30% of the time to producecookbooks, 50% of the time to produce travel guides, and 20% of thetime to produce handy spellers.
c. The warehouse is used to store finished units of product, so therental cost has been allocated to the product lines on the basis ofsales dollars. The warehouse rental cost is $3 per square foot peryear. The warehouse contains 48,000 square feet of space, of which7,200 square feet is used by the cookbook line, 24,000 square feetby the travel guide line, and 16,800 square feet by the handyspeller line.
d. The general sales cost above includes the salary of the salesmanager and other sales costs not traceable to any specific productline. This cost has been allocated to the product lines on thebasis of sales dollars.
e. The general administration cost and depreciation of officefacilities both relate to administration of the company as a whole.These costs have been allocated equally to the three productlines.
f. All other costs are traceable tothe three product lines in the amounts shown on the statementabove.
The management of DiversifiedProducts, Inc., is anxious to improve the publishing company's 5%return on sales.
Required:
1. Prepare a new contribution format segmented income statement forthe month. Adjust allocations of equipment depreciation and ofwarehouse rent as indicated by the additional informationprovided.
Total Company Cook-Book Travel Guide Handy Speller Sales Variableexpenses: Printing cost Advertising General sales Salaries Totalvariable expenses 0 0 0 0 0 0 0 0 Traceablefixed expenses: Totaltraceable fixed expenses 0 0 0 0 0 $0 $0 $0 Commonfixed expenses: Generalsales Generaladministration Depreciationoffice facilities Totalcommon fixed expenses 0 Net operating income $0
2. After seeing the income statement in the main body of theproblem, management has decided to eliminate the cookbook becauseit is not returning a profit, and to focus all available resourceson promoting the travel guide.
a. Based on the statementyou have prepared, do you agree with the decision to eliminate thecookbook? Yes No
b-1. Compute thecontribution margin ratio for each product. (Round youranswers to the nearest whole percent.) Cook-Book Travel Guide Handy Speller Contribution margin ratio % % %
b-2. Based on the statementyou have prepared, do you agree with the decision to focus allavailable resources on promoting the travel guide? Yes No
Diversified Products, Inc., has recently acquired a smallpublishing company that offers three books for salea cookbook, atravel guide, and a handy speller. Each book sells for $10. Thepublishing companys most recent monthly income statement is givenbelow: |
Product Line | ||||||||||||
| Total Company | Cookbook | Travel Guide | Handy Speller | |||||||||
| Sales | $ | 300,000 | $ | 90,000 | $ | 150,000 | $ | 60,000 | ||||
| Expenses: | ||||||||||||
| Printing costs | 102,000 | 27,000 | 63,000 | 12,000 | ||||||||
| Advertising | 36,000 | 13,500 | 19,500 | 3,000 | ||||||||
| General sales | 18,000 | 5,400 | 9,000 | 3,600 | ||||||||
| Salaries | 33,000 | 18,000 | 9,000 | 6,000 | ||||||||
| Equipmentdepreciation | 9,000 | 3,000 | 3,000 | 3,000 | ||||||||
| Sales commissions | 30,000 | 9,000 | 15,000 | 6,000 | ||||||||
| Generaladministration | 42,000 | 14,000 | 14,000 | 14,000 | ||||||||
| Warehouse rent | 12,000 | 3,600 | 6,000 | 2,400 | ||||||||
| Depreciationofficefacilities | 3,000 | 1,000 | 1,000 | 1,000 | ||||||||
| Total expenses | 285,000 | 94,500 | 139,500 | 51,000 | ||||||||
| Net operating income(loss) | $ | 15,000 | $ | (4,500) | $ | 10,500 | $ | 9,000 | ||||
| The followingadditional information is available about the company: |
| a. | Only printing costs and sales commissions are variable; allother costs are fixed. The printing costs (which include materials,labor, and variable overhead) are traceable to the three productlines as shown in the statement above. Sales commissions are 10% ofsales for any product. |
| b. | The same equipment is used to produce all three books, so theequipment depreciation cost has been allocated equally among thethree product lines. An analysis of the companys activitiesindicates that the equipment is used 30% of the time to producecookbooks, 50% of the time to produce travel guides, and 20% of thetime to produce handy spellers. |
| c. | The warehouse is used to store finished units of product, so therental cost has been allocated to the product lines on the basis ofsales dollars. The warehouse rental cost is $3 per square foot peryear. The warehouse contains 48,000 square feet of space, of which7,200 square feet is used by the cookbook line, 24,000 square feetby the travel guide line, and 16,800 square feet by the handyspeller line. |
| d. | The general sales cost above includes the salary of the salesmanager and other sales costs not traceable to any specific productline. This cost has been allocated to the product lines on thebasis of sales dollars. |
| e. | The general administration cost and depreciation of officefacilities both relate to administration of the company as a whole.These costs have been allocated equally to the three productlines. |
| f. | All other costs are traceable tothe three product lines in the amounts shown on the statementabove. |
The management of DiversifiedProducts, Inc., is anxious to improve the publishing company's 5%return on sales. |
| Required: |
| 1. | Prepare a new contribution format segmented income statement forthe month. Adjust allocations of equipment depreciation and ofwarehouse rent as indicated by the additional informationprovided. |
|
| 2. | After seeing the income statement in the main body of theproblem, management has decided to eliminate the cookbook becauseit is not returning a profit, and to focus all available resourceson promoting the travel guide. |
| a. | Based on the statementyou have prepared, do you agree with the decision to eliminate thecookbook? | ||||
|
| b-1. | Compute thecontribution margin ratio for each product. (Round youranswers to the nearest whole percent.) | |||||||||||||||||
| ||||||||||||||||||
| b-2. | Based on the statementyou have prepared, do you agree with the decision to focus allavailable resources on promoting the travel guide? | ||||
|
