Question

Hendrix has four operating divisions. During the first quarter of 2018, the company reported the divisional results shown below and aggregate income shown below.
Division:	North America	South America	Europe	Asia	Aggregate Income
Sales	$          543,434	$          423,514	$          330,562	$          194,046
Cost of goods sold	337,346	277,435	294,354	161,480
Selling and administrative expenses	65,959	87,145	73,142	75,236
Income (loss) from operations	$          140,129	$             58,934	$          (36,934)	$          (42,670)	$       119,459
Analysis reveals the following percentages of variable costs in each division.
Division:	North America	South America	Europe	Asia
Cost of goods sold	69.0%	80.5%	77.0%	91.0%
Selling and administrative expenses	39.0%	49.5%	63.0%	71.0%
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 (Europe and Asia). 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 Europe and Asia Divisions. (See illustration 20-17 for guidance, if needed.)
(b) Prepare an incremental analysis concerning the possible discontinuance of (1) Europe Division and (2) Asia 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 Hendrix Industries, 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