Question

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.
Division:	North	South	East	West	Aggregate Income
Sales	$             459,000	$              351,000	$              279,000	$              162,000
Cost of goods sold	270,000	225,000	243,000	135,000
Selling and administrative expenses	54,000	72,000	58,500	63,000
Income (loss) from operations	$             135,000	$                 54,000	$               (22,500)	$               (36,000)	$         130,500
Analysis reveals the following percentages of variable costs in each division.
Division:	North	South	East	West
Cost of goods sold	70%	80%	75%	90%
Selling and administrative expenses	40%	50%	65%	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 Illustrations 20-16 and 20-17 for guidance, if needed.)

Answer 1

Solution a:

Identification of Variable & Fixed Cost
Particulars	North	South	East	West
Cost of Goods Sold:
Total cost of goods sold	$270,000.00	$225,000.00	$243,000.00	$135,000.00
% of variable COGS	70%	80%	75%	90%
Variable COGS	$189,000.00	$180,000.00	$182,250.00	$121,500.00
Fixed COGS	$81,000.00	$45,000.00	$60,750.00	$13,500.00
Selling & Administrative Expense:
Total Selling & Adminstrative Expense	$54,000.00	$72,000.00	$58,500.00	$63,000.00
% of Variable Cost	40%	50%	65%	70%
Variable Selling & Administrative Expense	$21,600.00	$36,000.00	$38,025.00	$44,100.00
Fixed Selling& Administrative Expense	$32,400.00	$36,000.00	$20,475.00	$18,900.00

Computation of Contribution Margin for East & West divison
Particulars	East	West
Sales	$279,000.00	$162,000.00
Variable Cost:
Variable COGS	$182,250.00	$121,500.00
Variable Selling & Administrative Expense	$38,025.00	$44,100.00
Contribution	$58,725.00	-$3,600.00

Solution b:

Incremental Analysis - East Division
Particulars	Alt 1 - Continue	Alt 2 - Discontinue	Difference (Alt2)
Sales	$279,000.00	$0.00	-$279,000.00
Variable Cost:
Variable COGS	$182,250.00	$0.00	-$182,250.00
Variable Selling & Administrative Expense	$38,025.00	$0.00	-$38,025.00
Contribution	$58,725.00	$0.00	-$58,725.00
Fixed Cost:
Fixed COGS	$60,750.00	$30,375.00	-$30,375.00
Fixed Selling& Administrative Expense	$20,475.00	$10,237.50	-$10,237.50
Net Income	-$22,500.00	-$40,612.50	-$18,112.50

As there is incremental loss of $18,112.50 on discontinuance, therefore East division should not be discontinued.

Incremental Analysis - West Division
Particulars	Alt 1 - Continue	Alt 2 - Discontinue	Difference (Alt2)
Sales	$162,000.00	$0.00	-$162,000.00
Variable Cost:
Variable COGS	$121,500.00	$0.00	-$121,500.00
Variable Selling & Administrative Expense	$44,100.00	$0.00	-$44,100.00
Contribution	-$3,600.00	$0.00	$3,600.00
Fixed Cost:
Fixed COGS	$13,500.00	$6,750.00	-$6,750.00
Fixed Selling& Administrative Expense	$18,900.00	$9,450.00	-$9,450.00
Net Income	-$36,000.00	-$16,200.00	$19,800.00

As there is incremental benefit of $19,800 on discontinuance, therefore West division should be discontinued.

Solution c:

Income Statement - Wayne Manufacturing
Particulars	North	South	East	Total
Sales	$459,000.00	$351,000.00	$279,000.00	$1,089,000.00
Variable Cost:
Variable COGS	$189,000.00	$180,000.00	$182,250.00	$551,250.00
Variable Selling & Administrative Expense	$21,600.00	$36,000.00	$38,025.00	$95,625.00
Contribution	$248,400.00	$135,000.00	$58,725.00	$442,125.00
Fixed Cost:
Fixed COGS	$81,000.00	$45,000.00	$60,750.00	$186,750.00
Fixed Selling& Administrative Expense	$32,400.00	$36,000.00	$20,475.00	$88,875.00
Allocated Fixed Cost of West Divison ($16200/3)	$5,400.00	$5,400.00	$5,400.00	$16,200.00
Net Income	$129,600.00	$48,600.00	-$27,900.00	$150,300.00