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 Aggregate Income Division: North South East West $561,000 $ 341,000 $ 297,000 71,500 (27,500$ 429,000 $ Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations 198,000 165,000 77,000 (44,000) $ 159,500 330,000 66,000 275,000 88,000 66,000 $ $165,000 $ Analysis reveals the following percentages of variable costs in each division Division: North South East West Cost of goods sold Selling and administrative expenses 70% 40% 80% 50% 75% 65% 90% 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 elther 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.,) Problem &Instructions; Solutions Sheet3 Ready

Explanation / Answer

a) Contribution Margin :

East = VC = 297000*75% + 71500*65% = $269225

FC = Total cost - VC = $99275

CM = Sales - VC / Sales = 341000 - 269225 / 341000 = 21.05%

West = VC = $202400

FC = $39600

CM = Sales - VC / Sales = 198000 - 202400 / 198000 = - 2.22%

b) Incremental analysis :

So, closure of West division will be benefitial for Wayne Manufacturing. No, both should not be closed because then division east will fatch loss of $49637.5 instead of loss of $27500.

c) Income statement :

east west Division loss -27500 -44000 + Benefits on closure 49637.5 19800 Net benefits 22137.5 -24200

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