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 Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations 561,000429,00031,000198,000 165,000 77,000 275,000 88,000 66,000 297,000 71,500 27,500) S 330,000 66,000 165,000 $ 44,000 $159,500 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 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 lilustrations 20-16 and 20-17 for guidance, if needed.) Problem & Instructions Solutions Sheet3 + eady

Explanation / Answer

Answer a. Division East West Sales                    341,000                    198,000 Variable Costs: Cost of Goods Sold: East - $297,000 X 75%                    222,750 West - $165,0000 X 90%                    148,500 Selling & Admin. Expenses East - $71,500 X 65%                       46,475 West - $77,000 X 70%                      53,900 Total Variable Costs                    269,225                    202,400 Contribution                       71,775                      (4,400) Answer b. Incremental Analysis of Discontinuance of East Division Continue Eliminate Increase (Decrease) in Net Income Contribution Margin                       71,775                               -                     (71,775) Fixed Cost: Cost of Goods Sold                       74,250                      37,125                   (37,125) $297,000 X 25% $74,250 X 50% Selling & Admin Exp.                       25,025                      12,513                   (12,513) $71,500 X 35% $25,025 X 50% Total Fixed Expenses                       99,275                      49,638                   (49,638) Income (Loss) from Operations                    (27,500)                    (49,638)                   (22,138) Incremental Analysis of Discontinuance of West Division Continue Eliminate Increase (Decrease) in Net Income Contribution Margin                       (4,400)                               -                         4,400 Fixed Cost: Cost of Goods Sold                       16,500                        8,250                     (8,250) $165,0000 X 10% $74,250 X 50% Selling & Admin Exp.                       23,100                      11,550                   (11,550) $77,000 X 30% $25,025 X 50% Total Fixed Expenses                       39,600                      19,800                   (19,800) Income (Loss) from Operations                    (44,000)                    (19,800)                     24,200 West Division should be discontinued - since it will increase the Net Income by $24,200. Answer c. Wayne Manufacturing Condensed Income Statement Division Total North South East Sales                    561,000                    429,000                   341,000              1,331,000 Less: Variable Costs Cost of Goods Sold                    231,000                    220,000                   222,750                  673,750 $330,000 X 70% $275,000 X 80% $297,000 X 75% Selling & Admn. Exp.                       26,400                      44,000                     46,475                  116,875 $66,000 X 40% $88,000 X 50% $71,500 X 65% Total Variable Costs                    257,400                    264,000                   269,225                  790,625 Contribution                    303,600                    165,000                     71,775                  540,375 Fixed Costs: Cost of Goods Sold                    101,750                      57,750                     77,000                  236,500 Selling & Admn Exp.                       43,450                      47,850                     28,875                  120,175 Total Fixed Costs                    145,200                    105,600                   105,875                  356,675 Income (Loss) from Operations                    158,400                      59,400                   (34,100)                  183,700 Calculation of Fixed Costs: North South East Cost of Goods Sold                       99,000                      55,000                     74,250 $330,000 X 30% $275,000 X 20% $297,000 X 25% Share of West Division                         2,750                        2,750                       2,750 $11,550/3 $8,250/3 $8,250/3 Total Cost of Goods Sold                    101,750                      57,750                     77,000 Selling & Admn. Exp.                       39,600                      44,000                     25,025 $66,000 X 60% $88,000 X 50% $71,500 X 35% Share of West Division                         3,850                        3,850                       3,850 $11,550/3 $8,250/3 $8,250/3 Total Selling & Admn. Expenses                       43,450                      47,850                     28,875

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