Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $213,000 and the following divisional results.
|Division I||Division II||Division III||Division IV|
|Cost of goods sold||200,000||192,000||300,000||250,000|
|Selling and administrative expenses||75,000||60,000||60,000||50,000|
|Income (loss) from operations||$(25,000)||$(52,000)||$140,000||$150,000|
Analysis reveals the following percentages of variable costs in each division.
|Cost of goods sold||75%||90%||80%||75%|
|Selling and administrative expenses||40||70||50||60|
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.
(a) Compute the contribution margin for Divisions I and II.
(b) Prepare an incremental analysis concerning the possible discontinuance of
(1) Division I and
(2) Division II.
What course of action do you recommend for each division?
(c) Prepare a columnar condensed income statement for Gutierrez Company, assuming Division II is eliminated. (Use the CVP format.) Division II's unavoidable fixed costs are allocated equally to the continuing divisions.
(d) Reconcile the total income from operations ($213,000) with the total income from operations without Division II.
Discontinuing a Division:
Before a seemingly loss-making division is discontinued, its costs should be examined in order to determine which costs are avoidable and which costs will continue and would have to be absorbed by the other divisions. Only the avoidable costs are relevant to the decision,
Answer and Explanation:
|Division I||Division II|
|Cost of goods sold||150,000
($200,000 x 0.75)
|Selling and administrative expenses||30,000||42,000|
(b) - (1)
Division I - Incremental Analysis
|Continue Division I||Discontinue Division I|
|Cost of goods sold||150,000||0|
|Selling and administrative expenses||30,000||0|
|Cost of goods sold||50,000
($200,000 - $150,000)
(50% will be avoided)
|Selling and administrative expenses||45,000||22,500|
|Operating Income (Loss)||$(25,000)||$(47,500)|
Division II - Incremental Analysis
|Continue Division II||Discontinue Division II|
|Cost of goods sold||172,800||0|
|Selling and administrative expenses||42,000||0|
|Cost of goods sold||19,200
($192,000 x 0.10)
(50% will be avoided)
|Selling and administrative expenses||18,000||9,000|
|Operating Income (Loss)||$(52,000)||$(18,600)|
Division I should be retained and division II should be discontinued.
Condenced Income Statement
|Division I||Division II||Division III||Division IV||Total|
|Cost of goods sold||150,000|| 240,000
($300,000 x 0.80)
($250,000 x 0.75)
|Selling and administrative expenses||30,000||30,000||30,000||90,000|
|Cost of goods sold||53,200
($50,000 + ($9,600 / 3))
($60,000 + (($9,600 / 3))
|Selling and administrative expenses|| 48,000
($45,000 + ($9,000 / 3))
|Income (loss) from operations||$(31,200)||$0||$133,800||$143,800||$246,400|
|Total Net income from operations||$213,000|
|Net income from operations without Division II||246,400|
|Incremental profit from discontinuing division II||$33,400
($52,000 - $18,600)
Learn more about this topic:
from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12