Question

Problem 6-28 Segment Reporting; Activity-Based Cost Assignment(L06-4] 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 $14. The publishing company's most recent monthly income statement is shown below Product line Total Travel Handy Company Cookbook Guide Seller $ 355,000 $112.000 172,000 $ 71,000 Sales Expensee: Printing costs Advertising General Sales Salaries Equipment depreciation Sales Commissione General administration Warehouse rent Depreciation office facilities Total expenses Met operating income (less) 113,000 38.000 47.000 14,600 21,300 6,720 44.000 23.500 9.000 3,000 35,500 11,200 45,300 15,100 14,200 4.480 6.300 2.100 335, 600 113,700 $ 19,400 $ 16,700) 64,100 25.000 10,320 10,100 3.000 17,200 15,100 6, 880 2.100 153,800 18,200 $ 10,900 7.100 4.260 10,400 3.000 1.100 15,100 2,840 2,100 3,100 7,900 $ 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 20% of the time to produce Cookbooks, 45% of the time to produce travel guides, and 35% 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 56,800 square feet of space, of which 9.400 square feet is used by the cookbook line, 26,200 square feet by the travel guide line, and 21,200 square feet by the handy speller line. 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 facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines. 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., is anxious to improve the publishing company's 5% return on sales < Prey 2 of 2 ! Next

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Answer 1

Segmented Income Statement
	Total Company	Cookbook	Travel Guide	Handy Speller
Sales	355,000	112,000	172,000	71,000
Less: Variable expenses
Printing costs	113,000	38,000	64,100	10,900
Sales Commissions	35,500	11,200	17,200	7100
Contribution Margin	206,500	62800	90700	53000
Lesse: Fixed costs
Advertising	47000	14600	25000	7400
Equipment Depreciation	9000	1800	4050	3150
Warehouse Rent	14,200	2,350	6,550	5300
Total traceable fixed expenses	70200	18750	35600	15850
Segment Margin	136300	44050	55100	37150
Fixed expenses not traceable
General Sales	21,300
Salaries	44,000
General Administration	45300
Depreciation-Office facilities	6300
Net operating income	19400
2a. No, as it is generating a segment margin of $44050
b-1 CM Ratio = CM/Sales	58.17%	56.07%	52.73%	74.65%
b-2 No, since the contribution margin ratio is lowest for travel guide