Vernon Manufacturing Co. produces and sells specialized equipment used in the pe
ID: 2414030 • Letter: V
Question
Vernon Manufacturing Co. produces and sells specialized equipment used in the petroleum industry. The company is organized into three separate operating branches: Division A, which manufactures and sells heavy equipment; Division B, which manufactures and sells hand tools; and Division C, which makes and sells electric motors. Each division is housed in a separate manufacturing facility. Company headquarters is located in a separate building. In recent years, Division B has been operating at a net loss and is expected to continue to do so. Income statements for the three divisions for 2017 follow.
Required
a-1. Based on the preceding information, recommend whether to eliminate Division B.
a-2. Prepare companywide income statements before and after eliminating Division B.
b. During 2017, Division B produced and sold 25,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 36,000 units in 2018?
c. Suppose that Solomon could sublease Division B's manufacturing facility for $415,000. Assuming that Division B currently has a production and sales volume of 36,000 units, determine whether Solomon should accept the opportunity to sublease the facility or continue production at Division B.
Based on the preceding information, recommend whether to eliminate Division B. (Negative amounts should be indicated by a minus sign.)
During 2017, Division B produced and sold 25,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 36,000 units in 2018? (Do not round intermediate calculations.)
Suppose that Vernon could sublease Division B’s manufacturing facility for $415,000, at a production and sales volume of 36,000 units. Calculate the contribution to profit of Division B. (Negative amounts should be indicated by a minus sign.)
Division A Division B Division C Sales $ 4,300,000 $ 1,250,000 $ 4,400,000 Less: Cost of goods sold Unit-level manufacturing costs (2,700,000 ) (900,000 ) (2,980,000 ) Rent on manufacturing facility (510,000 ) (290,000 ) (300,000 ) Gross margin 1,090,000 60,000 1,120,000 Less: Operating expenses Unit-level selling and admin. expenses (196,000 ) (64,125 ) (246,000 ) Division-level fixed selling and admin. expenses (350,000 ) (82,000 ) (327,000 ) Headquarters facility-level costs (170,000 ) (170,000 ) (170,000 ) Net income (loss) $ 374,000 $ (256,125 ) $ 377,000Explanation / Answer
working Division A Division B Division C Total Sales $4,300,000 1,250,000 4400000 $9,950,000 Less: Cost of goods sold Unit-level manufacturing costs -2700000 -900000 -2980000 ($6,580,000) Rent on manufacturing facility -510000 -290000 -300000 ($1,100,000) Gross margin $1,090,000 $60,000 $1,120,000 $2,270,000 Less: Operating expenses Unit-level selling and admin. expenses -196000 -64125 -246000 ($506,125) Division-level fixed selling and admin. expenses -350000 -82000 -327000 ($759,000) Headquarters facility-level costs -170000 -170000 -170000 ($510,000) Net income (loss) $374,000 ($256,125) $377,000 $494,875 If Divison B is eliminated Answer 1 Division A Division C Total Sales $4,300,000 4400000 $8,700,000 Less: Cost of goods sold Unit-level manufacturing costs -2700000 -2980000 ($5,680,000) Rent on manufacturing facility -510000 -300000 ($810,000) Gross margin $1,090,000 $1,120,000 $2,210,000 Less: Operating expenses Unit-level selling and admin. expenses -196000 -246000 ($442,000) Division-level fixed selling and admin. expenses -350000 -327000 ($677,000) Segment margin $544,000 $547,000 $1,091,000 Headquarters facility-level costs 510000 Net income (loss) $581,000 Yes, Division B should be eliminated as there will be incraese in income by (581000-494875)=$86125 answer a2 Before Division A Division B Division C Total Sales $4,300,000 1,250,000 4400000 $9,950,000 Less: Cost of goods sold Unit-level manufacturing costs -2700000 -900000 -2980000 ($6,580,000) Rent on manufacturing facility -510000 -290000 -300000 ($1,100,000) Gross margin $1,090,000 $60,000 $1,120,000 $2,270,000 Less: Operating expenses Unit-level selling and admin. expenses -196000 -64125 -246000 ($506,125) Division-level fixed selling and admin. expenses -350000 -82000 -327000 ($759,000) Headquarters facility-level costs -170000 -170000 -170000 ($510,000) Net income (loss) $374,000 ($256,125) $377,000 $494,875 After If Divison B is eliminated Division A Division C Total Sales $4,300,000 4400000 $8,700,000 Less: Cost of goods sold Unit-level manufacturing costs -2700000 -2980000 ($5,680,000) Rent on manufacturing facility -510000 -300000 ($810,000) Gross margin $1,090,000 $1,120,000 $2,210,000 Less: Operating expenses Unit-level selling and admin. expenses -196000 -246000 ($442,000) Division-level fixed selling and admin. expenses -350000 -327000 ($677,000) Segment margin $544,000 $547,000 $1,091,000 Headquarters facility-level costs 510000 Net income (loss) $581,000 ans b No. of units is 25000 Division B Cost per unit Sales 1,250,000 50 Less: variable cost Unit-level manufacturing costs -900000 -36 Unit-level selling and admin. expenses -64125 -2.5650 Contribution margin 11.4350 If sales is 36000 than no. of units*cost/revenue per unit Sales (36000*50) 1800000 Less: variable cost Unit-level manufacturing costs -1296000 Unit-level selling and admin. expenses -92340 Contribution margin 411660 ans c Yes , Diviison B should be eliminated Yes , he should accept the opportunity to sublease as contribution margin of $411660 is less than $415000 that he would earn
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