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

Decision: it is very clear from above incremental analysis that closure of East Division will result into a loss of $18,112.50 whereas closure of West division will result into a savings of $19,800. Therefore East division should not be closed whereas west division should be closed.

Verification of new total profit after discontinuance of West Division = Exisiting profit + savings from elimination

= 130,500 + 19,800 = $150,300