Question

J.M Smucker Company operates two divisions, the Fruit Preserves Division and the Snack Foods Division. The Fruit Preserves Division manufactures and sells jelly and jams to supermarkets. The Snack Foods Division sells its products to theme parks. The company is considering disposing of the Snack Foods Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2017 are presented below:

                             Fruit Preserves    Snack Foods

                                Division       Division             Total

Sales revenue                   $1,500,000         $500,000        $2,000,000

Cost of goods sold                 900,000        350,000       1,250,000

Gross profit                       600,000          150,000           750,000

Selling & admin expenses           250,000          180,000           430,000

Net income                     $   350,000        $(30,000)       $   320,000

In the Snack Foods Division, 60% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs. The management of the company feels it can save $60,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Snack Foods Division.

Instructions

(a) Determine whether the company should discontinue operating the Snack Foods Division. Prepare a schedule which supports your decision.

(b) If the company had discontinued the division for 2017, determine what net income would have been.

Answer 1

Solution a:

Incremental Analysis - J. M Smucker Comapny
Particulars	Continue Snack Foods division	Discontinue Snack Foods division	Financial advantage (disadvantage) of Discontinuing
Sales	$5,00,000.00	$0.00	-$5,00,000.00
Less: Variable costs
Variable cost of Goods sold (60%)	$2,10,000.00	$0.00	-$2,10,000.00
Variable selling and admin expenses (25%)	$45,000.00	$0.00	-$45,000.00
Contribution Margin	$2,45,000.00	$0.00	-$2,45,000.00
Less: Fixed Costs
Cost of Goods sold (40%)	$1,40,000.00	$80,000.00	-$60,000.00
Selling and admin expenses (75%)	$1,35,000.00	$85,000.00	-$50,000.00
Net Income	-$30,000.00	-$1,65,000.00	-$1,35,000.00

No, Company should not discontinue operating the Snack Foods Division because there is financial disadvantage of $135,000 if discontinued.

Solution 2:

If the company had discontinued the division for 2017, Net Income = Fruit Division net income - Unavoidable Fixed cost of Snack foods division

= $350000 - $80000 - $85000

= $185,000