Brislin Company has four operating divisions. During the first quarter of 2017, the company...

Question:

Brislin Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $ 231,300 and the following divisional results :

Division
I II III IV
Sales $253,000 $195,000 $502,000 $449,000
Cost of goods sold $197,000 $190,000 $295,000 $246,000
Selling and administrative expenses $75,700 $57,000 $60,000 $47,000
Income  (loss) from operations $(19,700) $(52,000) $147,000 $156,000

Analysis reveals the following percentages of variable costs in each division :

I II III IV
Cost of goods sold 67% 89% 81% 73%
Selling and administrative expenses 37% 62% 48% 59%

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Top Management is very concerned about the unprofitable divisions ( I and II ). Consensus is that one or both of the divisions should be discontinued.

1.) Compute the contribution margin for Divisions I and II. ( Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45) )

Division I Division II
Contribution Margin

2.) Prepare an incremental analysis concerning the possible discontinuance of Division I. ( Round answers to 0 decimal places, e.g. 1,525. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Continue Eliminate Net Income Increase (Decrease)
$ $ $
Contribution Margin
Fixed Costs
Cost of goods sold
Selling and administrative expenses
Total Fixed expenses
Income (Loss) from operations $ $ $

Eliminating a Division:

The relevant costs to consider when calculating the financial impact that closing a division will have should all be avoidable if the division is closed. These usually includes all the variable costs but only some (or none) of the fixed costs.

Answer and Explanation:


(a)

Division I Division II
Sales revenue $253,000 $195,000
Variable Costs
Cost of goods sold 131,990
($197,000 x 0.67)
169,100
Selling and administrative expenses 28,009 35,340
Contribution margin $93,001 ($9,440)


2.)

Division I - Incremental Analysis

Continue Eliminate Net Income Increase (Decrease)
Sales revenue $253,000 0 $(253,000)
Variable Costs
Cost of goods sold 131,900 0 131,900
Selling and administrative expenses 28,009 0 28,009
Contribution margin $93,001 0 $(93,001)
Fixed Costs
Cost of goods sold 65,010
($197,000 x 0.33)
32,505
(50% will be avoided)
32,505
Selling and administrative expenses 47,691 23,845 23,846
Operating Income (Loss) $(19,700) $(56,350) $(36,650)



Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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