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 speller. Each book sells for $10. The publishing company's most recent monthly income statement is shown below. Product Line Total Travel Handy Company Cookbook Guide Speller Sales $ 300,000 $90,000 $150,000 $60,000 Expensest Printing costs 102,000 27, 63,000 12. eee 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 Equipment depreciation 9,000 3,000 3,000 3,000 Sales commissions 30,000 9.000 15,000 6. General administration 42,000 14,000 14,000 14,000 Warehouse rent 12,000 3,600 6,000 2,400 Depreciation-office facilities 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 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 expense 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, 50% of the time to produce travel guides, and 20% of the time to produce handy spellers The warehouse is cert store finished units of neurt en the rental rnct has been allocated in the reduct lines on the basis of

Answer 1

1) Total Company $300,000 Cookbook $90,000 Travel Guide $150,000 Handy Speller $60,000 --> (a) $102,000 $30,000 $132,000 $168,000 $27,000 $9,000 $36,000 $54,000 $63,000 $15,000 $78,000 $72,000 $12,000 (Given] $6,000 (Given] $18,000 --> (b) $42,000 --> (c) = (a) - (b) Sales Variable costs: Printing costs Sales commissions Total variable costs Contribution margin Traceable Fixed expenses: Advertising Salaries Equipment depreciation Warehouse rent Total Traceable Fixed expenses Product line segment margin Common fixed costs: General sales General administration Depreciation - office facilities Total Common fixed costs Net operating income (loss) $36,000 $33,000 $9,000 $12,000 $90,000 $78,000 $13,500 $18,000 $2,700 $1,800 $36,000 $18,000 $19,500 $9,000 $4,500 $6,000 $39,000 $33,000 $3,000 (Given] $6,000 (Given] $1,800 ($9000 x 30%; $9000 x 50%; $9000 x 20%] $4,200 ($12000 x (7200 / 48000); $12000 x (24000 / 48000); $12000 x (16800 / 48000)] $15,000 --> (d) $27,000 --> (e) = (c) - (d) $18,000 $42,000 $3,000 $63,000 --> (f) $15,000 --> (e) - (f)

2a) No, based on the new contribution format segmented income statement prepared, I do not agree with management's plan to eliminate the cookbook as it earns positive product line segment margin of $18,000 2b-1) Contribution margin ratio = (Contribution margin / Sales) x 100 Contribution margin Sales Contribution margin ratio Cookbook $54,000 $90,000 60.00% Travel Guide $72,000 $150,000 48.00% Handy Speller $42,000 --> (a) $60,000 --> (b) 70.00% --> [(a)/(b)] x 100 or = 60% 48% 70% --> if rounded off to zero decimal place. 2b-2) No, based on the statement prepared, I do not agree with the decision to focus all available resources on promoting the travel guide because there are some common fixed expenses which are not traceable to any products. If these are considered, the pricing of each product will be unfair.