(a) Riverbed Company has four operating divisions. During the first quarter of 2
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Question
(a)
Riverbed Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $191,000 and the following divisional results.Division I II III IV Sales $250,000 $198,000 $496,000 $443,000 Cost of goods sold 205,000 190,000 297,000 255,000 Selling and administrative expenses 70,000 64,000 61,000 54,000 Income (loss) from operations $ (25,000) $ (56,000) $138,000 $134,000
Analysis reveals the following percentages of variable costs in each division.
I II III IV Cost of goods sold 69 % 89 % 80 % 74 % Selling and administrative expenses 37 61 51 58
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 (I and II). Consensus is that one or both of the divisions should be discontinued.
Explanation / Answer
Solution :
I
II
SALES
A
253,000
195,000
COGS
197,000
190,000
VARIABLE COST
B
131,990
(197000x67%)
169,100
(190000x89%)
SELLING & ADMINISTRATIVE
75,700
57,000
VARIABLE COST
C
28,009
(75700x37%)
35,340
(57000x62%)
Contribution Margin
A - B- C
93,001
- 9,440
b1. INCREMENTAL ANALYSIS
CONTINUE
ELIMINATE
NET INCOME
INCREASE (DECREASE)
CONTRIBUTION MARGIN
93,001
-
93,001
FIXED COST*
COGS
65,010
32,505
32,505
SELLING & ADMINISTRATIVE
47,691
23,846
23,846
TOTAL FIXED EXPENSE
112,701
56,351
56,351
INCOME (LOSS) FROM OPERATION
- 19,700
- 56,351
36,651
It is better to continue division I as its loss (19700) is lower as compared to when eliminated (56351)
*FIXED COST
COGS
SELLING & ADMINISTRATIVE
TOTAL
197,000
75,700
VARIABLE (as calculated in a)
131,990
28,009
FIXED COST
65,010
47,691
- Contribution Margin
I
II
SALES
A
253,000
195,000
COGS
197,000
190,000
VARIABLE COST
B
131,990
(197000x67%)
169,100
(190000x89%)
SELLING & ADMINISTRATIVE
75,700
57,000
VARIABLE COST
C
28,009
(75700x37%)
35,340
(57000x62%)
Contribution Margin
A - B- C
93,001
- 9,440
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