Consider the following information regarding Wayne Manufacturing Company and the

Question

Consider the following information regarding Wayne Manufacturing Company and the following instructions. This is similar to Problems 20-5A and 20-5B in our textbook. Wayne Manufacturing Company has four operating divisions. During the first quarter of 2016, the company reported the divisional results shown below and aggregate income shown below. Division: North South East West Aggregate Income Sales $454,410 $347,490 $276,210 $160,380 Cost of goods sold 267,300 222,750 240,570 133,650 Selling and administrative expenses 53,460 71,280 57,915 62,370 Income (loss) from operations $133,650 $53,460 $(22,275) $(35,640) $129,195 Analysis reveals the following percentages of variable costs in each division. Division: North South East West Cost of goods sold 70% 80% 75% 90% Selling and administrative expenses 40% 50% 65% 70% 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 (East and West). Consensus is that one or both of the divisions should be discontinued. Instructions - Your solutions should be clearly labeled on Solutions of this workbook. (a) Compute the contribution margin for the East and West Divisions. (See illustration 20-17 for guidance, if needed.) (b) Prepare an incremental analysis concerning the possible discontinuance of (1) East Division and (2) West Division. What course of action do you recommend for each division? Should either be closed? (See illustration 20-18 for guidance, if needed.) (c) Prepare a columnar condensed income statement for Wayne Manufacturing, assuming the division(s) that should be eliminated are eliminated. Use the CVP format. Remember: Closed division's unavoidable fixed costs are allocated equally to the continuing divisions. (See Illustrations 20-16 and 20-17 for guidance, if needed.)

Explanation / Answer

ans a Division: East West Sales $276,210 $160,380 Cost of goods sold (240570*75%),(133650*90%) 180428 120285 Selling and administrative expenses (57915*65%) (62370*70%) 37645 43659 Total variable cost 218072 163944 Contribution Margin $58,138 ($3,564) If rounded to two decimal $58,137.75 ($3,564.00) ans b East Division Continue Eliminate Net Income Increase/(decrease) Contribution Margin $58,138 ($58,138) Fixed cost (avoidable) Cost of goods sold 60143 30071 -30071 (240570*25%) (60141.5*50%) Selling and administrative expenses 20270 10135 -10135 (57915*35%) Total Fixed cost 80413 40206 -40206 Income/(loss) from operations) ($22,275) ($40,206) ($17,931) West Division Continue Eliminate Net Income Increase/(decrease) Contribution Margin ($3,564) $3,564 Fixed cost (avoidable) Cost of goods sold 13365 6683 -6683 (133650*10%) (13365*50%) Selling and administrative expenses 18711 9356 -9356 (62370*30%) Total Fixed cost 32076 16038 -16038 Income/(loss) from operations) ($35,640) ($16,038) $19,602 West Diviion should be eliminated ans c ans 1 Division: North South East Total Sales 454410 $347,490 $276,210 1078110 Cost of goods sold 187110 178200 180428 545738 (267300*70%) (222750*80%) Selling and administrative expenses 21384 35640 37645 94669 (53460*40%) (71280*50%) Total variable cost 208494 213840 218072 640406 Contribution Margin $245,916 $133,650 $58,138 437704 Fixed cost Cost of goods sold 82418 46778 62370 191566 Selling and administrative expenses 35195 38759 23389 97342 Total Fixed cost 117612 85536 85759 288908 Income/(loss) from operations) $128,304 $48,114 ($27,621) $148,796 working North South East Fixed cost Cost of goods sold 80190 44550 60143 (267300*30%) (222750*20%) Cost of goods sold WEST DIVISION (6683*1/3) 2228 2228 2228 Total 82418 46778 62370 Selling and administrative expenses 32076 35640 20270 (53460*60%) (71280*50%) Selling and administrative expenses 3119 3119 3119 (9356*1/3) Total 35195 38759 23389

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