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 speler. Each book sells for $13. The publishing company's most recent monthly Income statement is shown below. Product line Total Travel Handy Company Cookbook Guide Speller $350,000 $110,000 $170,000 $70,000 112.000 46.000 21,000 43,000 8,700 37,000 14.500 6,600 22,500 2,900 64,000 24.500 10,200 10,000 2,900 11,000 2.000 4,200 10,500 2,900 35,000 11,000 17,000 7,000 Sales Expenses Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation office facilities Total expenses Net operating income (los) 45,000 15,000 15,000 15,000 14,000 4,400 6,800 2,800 6,000 2,000 2,000 2,000 330,700 115,900 152,400 62,400 $ 19,300 $ (5,900) $ 17,600 $ 7,600 The following additional Information is available: 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 income statement above. Sales commissions are 10% of sales. 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 40% of the time to produce cookbooks, 40% of the time to produce travel guides, and 20% 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 56,000 square feet of space, of which 9,200 square feet is used by the cookbook ne, 26,000 square feet by the travel guideline, and 20.800 square feet by the handy spellerine 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 fac tes both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines t All other costs are traceable to the three product lines in the amounts shown on the income statement above. The management of Diversified Products, Inc., Isandous to improve the publishing company's 4% return on sales.

Answer 1

Diversified Products Inc. Requirement 1 Total Travel Handy Company CookBook Guide Speller 350000 110000 170000 70000 112000 35000 147000 203000 37000 11000 48000 62000 64000 17000 81000 89000 11000 7000 18000 52000 Sales Variable Expenses: Printing Cost Sales Commission Total Variable expenses Contribution Margin Traceable Fixed expenses: Advertising Salaries Equip.Depre. Warehouse Rent Total Traceable Fixed expenses Product line segment margin Common Fixed Expenses: General Sales General Administration Depreciation - Office Facilities Total Common Fixed Expenses Net Operating Income(loss) 46000 43000 8700 14000 111700 91300 14500 22500 3480 2300 4 2780 1 9220 24500 10000 3480 6500 44480 44520 7000 10500 1/40 5200 24440 27560 21000 45000 6000 72000 19300 Warehouse Rent = 56000 sq ft x 3 = 168000 / 12 months = 14000 per month $14000 / 56000 sq ft = $0.25 sq foot per month $0.25 x 9200 = 2300; $0.25x 26000 = 6500; $0.25 x 20800 = 5200 Requirement 2a. No. The CookBookline should not be eliminated. The Cookbook is covering all of its own costs and is generating an $19220 segment margin toward covering the company's common costs and towards profits. Requirement 2b1. Contribution Margin Sales Contribution Margin Ratio Travel CookBook Guide 62000 89000 110000 170000 56.36% 52.35% Handy Speller 52000 70000 74.29% Requirement 2b2. It is unwise to focus all available resources on promoting travel guide. The company is already spending more on the promotion of this product than on the other two products combined. Furthermore, the travel guide has the lowest constribution margin ratio of the three products. Therefore a dollar of sales of the travel guide generates less profit than a dollar of sales of either of the two other products.