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

North

South

East

West

TOTAL

Sales

561000

429000

341000

198000

1529000

Cost of Goods Sold

330000

275000

297000

165000

1067000

Variable

231000

220000

222750

148500

822250

Fixed

99000

55000

74250

16500

244750

Selling & Administrative exp

66000

88000

71500

77000

302500

Variable

26400

44000

46475

53900

170775

Fixed

39600

44000

25025

23100

131725

Income (loss) from operation

165000

66000

(27500)

(44000)

159500

North

South

East

West

Sales (A)

561000

429000

341000

198000

Cost of Goods Sold

231000

220000

222750

148500

Selling & Administrative exp

26400

44000

46475

53900

Total variable cost (B)

257400

264000

269225

202400

Contribution Margin (A – B)

303600

165000

71775

-4400

North

South

East

West

TOTAL

Sales

561000

429000

0

198000

1188000

Cost of Goods Sold

330000

275000

37125

165000

807125

Variable

231000

220000

0

148500

599500

Fixed

99000

55000

[50% only] 37125

16500

207625

Selling & Administrative exp

66000

88000

12512.5

77000

243512.5

Variable

26400

44000

0

53900

124300

Fixed

39600

44000

[50%] 12512.5

23100

119212.5

Income (loss) from operation

165000

66000

(49637.5)

(44000)

137362.5

North

South

East

West

TOTAL

Sales

561000

429000

341000

0

1331000

Cost of Goods Sold

330000

275000

297000

8250

910250

Variable

231000

220000

222750

0

673750

Fixed

99000

55000

74250

8250

236500

Selling & Administrative exp

66000

88000

71500

11550

237050

Variable

26400

44000

46475

0

116875

Fixed

39600

44000

25025

11550

120175

Income (loss) from operation

165000

66000

(27500)

(19800)

183700

---- Since, closing ‘West’ Division is leading to the total Net Income of $183700 which is more than the current Total Net Income of $159500, the ‘West Division’ can be closed.

North

South

East

TOTAL

Sales (A)

561000

429000

341000

1331000

Variable Cost of Goods Sold

231000

220000

222750

673750

Variable Selling & Admin exp

26400

44000

46475

116875

Total Variable Cost (B)

257400

264000

269225

790625

Contribution Margin (C=A-B)

303600

165000

71775

540375

Fixed Cost of Goods Sold

99000

55000

74250

236500

Fixed Selling & Admin exp

39600

44000

25025

120175

Allocated Fixed Cost f Goods Sold of West

2750

2750

2750

Allocated Fixed Selling & Admin of West

3850

3850

3850

Total Fixed Cost (D)

145200

105600

105875

356675

Net Income (Loss) [C – D]

158400

59400

(34100)

183700

North

South

East

West

TOTAL

Sales

561000

429000

341000

198000

1529000

Cost of Goods Sold

330000

275000

297000

165000

1067000

Variable

231000

220000

222750

148500

822250

Fixed

99000

55000

74250

16500

244750

Selling & Administrative exp

66000

88000

71500

77000

302500

Variable

26400

44000

46475

53900

170775

Fixed

39600

44000

25025

23100

131725

Income (loss) from operation

165000

66000

(27500)

(44000)

159500

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