Question

Consider the following information regarding Wayne Manufacturing Company and the following instructions. This is similar to Problems 20-5A and 20-5B in our textbook.
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	$          368,072	$          281,467	$          223,730	$          129,908
Cost of goods sold	216,513	180,428	194,862	108,257
Selling and administrative expenses	43,303	57,737	46,912	50,520
Income (loss) from operations	$          108,257	$             43,303	$          (18,043)	$          (28,868)	$       104,649
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

(a)

Division:	East	West
Sales	223730	129908
Less: Variable costs
Cost of goods sold	146147	97431
Selling and administrative expenses	30493	35364
Total variable costs	176639	132795
Contribution margin $	47091	-2887

(b)(1) Incremental Analysis for discontinuance of East Division:

	Total	Discontinuance of East	Incremental net income (loss)
Sales	1003177	779447	-223730
Variable costs:
Cost of goods sold	539479	393333	146146
Selling and administrative expenses	112047	81554	30493
Total variable costs	651526	474887	176639
Contribution margin	351651	304560	-47091
Fixed costs:
Cost of goods sold	160581	136223	24358
Selling and administrative expenses	86425	78216	8210
Total fixed costs	247006	214439	32568
Income (loss) from operations	104645	90122	-14524

(b)(2) Incremental Analysis for discontinuance of West Division:

	Total	Discontinuance of West	Incremental net income (loss)
Sales	1003177	873269	-129908
Variable costs:
Cost of goods sold	539479	442048	97431
Selling and administrative expenses	112047	76683	35364
Total variable costs	651526	518731	132795
Contribution margin	351651	354538	2887
Fixed costs:
Cost of goods sold	160581	155168	5413
Selling and administrative expenses	86425	78847	7578
Total fixed costs	247006	234015	12991
Income (loss) from operations	104645	120523	15878

Working:

	North	South	East	West	Total
Variable costs:
Cost of goods sold	151559	144342	146146	97431	539479
Selling and administrative expenses	17321	28869	30493	35364	112047
Total variable costs	168880	173211	176639	132795	651525
Fixed costs:
Cost of goods sold	64954	36086	48716	10826	160581
Selling and administrative expenses	25982	28868	16419	15156	86425
Total fixed costs	90936	64954	65135	25982	247006

The West Division should be closed since there would be an incremental income of $15878 by its discontinuance while the East Division on the other hand should not be closed since its discontinuance would result in an incremental loss of $14524.

(c)

Wayne Manufacturing Company
Condensed CVP Income Statement
Sales	873269
Variable costs	518731
Contribution margin	354538
Fixed costs	234015
Income (loss) from operations $	120523