J.M Smucker Company operates two divisions, the Fruit Preserves Division and the
ID: 2467157 • Letter: J
Question
J.M Smucker Company operates two divisions, the Fruit Preserves Division and the Snack Foods Division. The Fruit Preserves Division manufactures and sells jelly and jams to supermarkets. The Snack Foods Division sells its products to theme parks. The company is considering disposing of the Snack Foods Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2015 are presented below:
Fruit Preserves Snack Foods
Division Division Total
Sales revenue $1,500,000 $500,000 $2,000,000
Cost of goods sold 900,000 350,000 1,250,000
Gross profit 600,000 150,000 750,000
Selling & admin expenses 250,000 180,000 430,000
Net income $ 350,000 $(30,000) $ 320,000
In the Snack Foods Division, 60% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs. The management of the company feels it can save $60,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Snack Foods Division.
Instructions
(a) Determine whether the company should discontinue operating the Snack Foods Division. Prepare a schedule which supports your decision.
(b) If the company had discontinued the division for 2015, determine what net income would have been.
Explanation / Answer
a.
For Snacks Food Division
Variable Cost under cost of goods sold = 60% of cost of goods sold = 60%*350000 = $210000
Variable cost under selling and administrative expenses = 25% of selling and admin expenses
Variable cost under selling and administrative expenses = 25%*180000 = $45000
Total variable cost = 210000 + 45000 = $255000
Thus,
Contribution Margin = Revenue – Total variable cost = 500000 – 255000 = $245000
Savings if Snacks foods operation is discontinued = 60000 + 50000 = $110000
Since, contribution margin offered by Snacks foods operation is significantly higher than the savings if operation is discontinued. Thus, snacks food operation should not be closed and it should be continued.
b.
If snacks food operation is discontinued,
Then,
Revenue = $1500000
Cost of goods sold = 900000 + 40%*350000 =$ 1040000
Gross profit = 1500000 – 1040000 = $460000
Selling and admin expenses = 250000 +75%*180000 = $385000
Savings due to closure of snacks food division = 60000+50000 = $110000
Net Income = Gross profit + savings –Selling and admin expenses = 460000 + 110000 –385000 = $185000
Thus, net income after the discontinuation of the snack food division is $185000.
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