Building Your Skills Analytical Thinking [L07-4) Diversified Products, Inc.,.has

Question

Building Your Skills Analytical Thinking [L07-4) 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 $16. The publishing company's most recent monthly Income statement Is shown below. total TravelBandy Sales 330,000 $102,000 162,000 66,000 Printing costs Advertiaing General sales Salariern Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities 63,60011,400 42,000 14,100 22,500 5,400 9.7203,960 9,600 5,400 2,500 16,200 6,600 14,60014,600 6,4802,640 1,600 1,600 311,100110,200 146,800 54,100 18,900 (8,200) 15,200 $ 11,900 6, 12 39,000 24,00 19,800 2,500 33,000 10,200 3,800 14,600 13,200 4,080 1,600 7,500 2,500 4,8001 Total expenses Net operating income (loes) 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, b. The same equipment is used to produce all three books, so the equipment depreciation expense has been allocated equally and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales. 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, 40% of the time to produce travel guides, and 40% 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 52,800 square feet of space, of which 8,400 square feet is used by the cookbook line, 25,200 square feet by the travel guide line, and 19,200 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

Explanation / Answer

1) Contribution Formated Segmented Income Statement (Amounts in $)

As there is segment income from all the three products, the company should continue producing all the three products.

2) a) No, I am not agree with management's plan to eliminate the cookbook because cookbook has contributed net segment income of $17,100.

2) b) Part 1) Contrinution Margin (CM) Ratio = Contribution Margin/Sales

CM ratio of Cookbook = ($58,000/$102,000)*100 = 58%

CM Ratio of Travel Guide = ($82,200/$162,000)*100 = 51%

CM Ratio of Handy Speller = ($48,000/$66,000)*100 = 73%

2) b) Part 2) Yes, I am agree because the higher segment income is from Travel Guide. (i.e. $40,800).

Particulars Total Company Cookbook Travel Guide Handy Speller Sales (A) 330,000 102,000 162,000 66,000 Variable Expenses: Printing Costs 108,000 33,000 63,600 11,400 Sales Commissions 33,000 10,200 16,200 6,600 Total Variable Exp. (B) 141,000 43,200 79,800 18,000 Contribution Margin (C = A-B) 189,000 58,800 82,200 48,000 Traceable Fixed Expenses: Equipment Depreciation (Allocated in the ratio of 20:40:40) 7,500 1,500 3,000 3,000 Warehouse rent per month (Allocated on the basis of square feet used) 13,200 [(52,800*$3)/12 months] 2,100 [(8,400*$3)/12 months] 6,300 [(25,200*$3)/12 months] 4,800 [(19,200*$3)/12 months] Advertising 42,000 14,100 22,500 5,400 Salaries 39,000 24,000 9,600 5,400 Total traceable Fixed expenses (D) 101,700 41,700 41,400 18,600 Segment Income/(Loss) (E = C-D) 87,300 17,100 40,800 29,400 Common Fixed Exp. General Sales 19,800 General Administration 43,800 Depreciation-Office facilities 4,800 Total common fixed expenses (F) 68,400 Net Income/(Loss) (E-F) 18,900

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