Wayne Manufacturing Company has four operating divisions. During the first quart
ID: 2561482 • Letter: W
Question
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 $413,100 $315,900 $251,100 $145,800 Cost of goods sold 243,000 202,500 218,700 121,500 Selling and administrative expenses 48,600 64,800 52,650 56,700 Income (loss) from operations $121,500 $48,600 $(20,250) $(32,400) $117,450 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
Wayne Manufacturing Company has four operating divisions. During the first quarter of 2016, the company reported aggregate income from operations of $117,450 and the following divisional results. Division North South East West Sales $ 413,100 $ 315,900 $ 251,100 $ 145,800 Cost of goods sold 243,000 202,500 218,700 121,500 Selling and administrative expenses 48,600 64,800 52,650 56,700 Income (loss) from operations $ 121,500 $ 48,600 $ (20,250) $ (32,400) Analysis reveals the following percentages of variable costs in each 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 (North and South). Consensus is that one or both of the divisions should be continued. Instructions: (a) Compute the contribution margin for Divisions East and West. East West Sales $ 251,100 $ 145,800 Variable costs Cost of goods sold 164,025 109,350 Selling and administrative 34,223 39,690 Total variable expenses 198,248 149,040 Contribution margin $52,853 ($3,240) (b)(1) Prepare an incremental analysis concerning the possible discontinuance of Division East. Division East Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) $52,853 $0 ($52,853) Fixed costs Cost of goods sold 54,675 27,338 (27,338) Selling and administrative 18,428 9,214 (9,214) Total fixed expenses 73,103 36,551 (36,551) Income (loss) from operations ($20,250) ($36,551) ($16,301) (b)(2) Prepare an incremental analysis concerning the possible discontinuance of Division West. Division West Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) ($3,240) $0 $3,240 Fixed costs Cost of goods sold 12,150 6,075 (6,075) Selling and administrative 17,010 8,505 (8,505) Total fixed expenses 29,160 14,580 (14,580) Income (loss) from operations ($32,400) ($14,580) $17,820 (b)(3) What course of action do you recommend for each division? Division West should be eliminated as its negative contribution margin is $3,240. Income from operations would increase $17,820 if Division West is eliminated. Division East should be continued because it is producing positive contribution margin of $52,853. Income from operations will decrease $16,301 by discontinuing this division. (c) Prepare a columnar condensed income statement for Wayne Manufacturing, assuming Division West is eliminated. Use the CVP format. Division West's unavoidable fixed costs are allocated equally to the continuing divisions. WAYNE MANUFACTURING COMPANY CVP Income Statement For the Quarter Ended March 31, 2016 Divisions North South East Total Sales $413,100 $ 315,900 $ 251,100 $980,100 Variable costs Cost of goods sold 170,100 162,000 164,025 496,125 Selling and administrative 19,440 32,400 34,223 86,063 Total variable costs 189,540 194,400 198,248 582,188 Contribution margin 223,560 121,500 52,853 397,913 Fixed costs Cost of goods sold (1) 74,925 42,525 56,700 174,150 Selling and administrative (2) 31,995 35,235 21,263 88,493 Total fixed costs 106,920 77,760 77,963 262,643 Income (loss) from operations $116,640 $43,740 ($25,110) $135,270 (1) Division’s fixed cost of goods sold plus 1/3 of Division West’s unavoidable fixed cost of goods sold [$121,500 × (100% – 90%) × 50% = $12,150]. Each division’s share is $2,025. (2) Division’s fixed selling and administrative expense plus 1/3 of Division West’s unavoidable fixed selling and administrative expenses [$56,700 × (100% – 70%) × 50% = $8,505]. Each division’s share is $2,835. (d) Reconcile the total income from operations, $117,450 with the total income from operations without Division West. Income from operations with Division West of $117,450 (given) plus incremental income of $17,820 from eliminating Division West = $135,270 income from operations without Division West.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.