Question

Problem 12-5 Ayayai Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $207,400 and the following divisional results. Division I II III IV Sales $249,000 $200,000 $498,000 $446,000 Cost of goods sold 205,000 192,000 305,000 248,000 Selling and administrative expenses 71,600 60,000 59,000 45,000 Income (loss) from operations $ (27,600) $ (52,000) $134,000 $153,000 Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 68 % 88 % 81 % 74 % Selling and administrative expenses 40 59 47 59 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.

Prepare an incremental analysis concerning the possible discontinuance of Division I. (Round answers to 0 decimal places, e.g. 1525. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Continue Eliminate Net Income Increase (Decrease) Contribution margin $ $ $ Fixed costs    Cost of goods sold    Selling and administrative       Total fixed expenses Income (loss) from operations $ $ $

Answer 1

Incremental analysis of discontinuation of Division I

	Continue	Eliminate	Increase / Decrease
	$	$	$
Contribution margin (See note below)	80,960	-	-80,960
Fixed Cost
Cost of goods sold (32%)	65,600	32,800	32,800
Selling and Admin Expenses (60%)	28,640	14,320	14,320
Income / Loss from Operation on discontinuation			-33,840

Note :
Contribution Marging of Division I
Sales	2,49,000
Variable Cost
Cost of goods sold (68%)	1,39,400
Selling and Admin Expenses (40%)	28,640
Total Variable Cost	1,68,040
Contribution	80,960

On discontinuation of Division I, there will be further net loss of $ 33840/-.