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

(a)
		East Division		West Division
	Sales	279000		162000
Less	Variable Costs
	Cost of Goods sold	(182250)		(121500)
		(243000*75%)		(135000*90%)
	Selling and Administrative Expense	(38025)		(44590)
		(58500*65%)		(63000*70%)
	Contribution	58725		(4090)
(b)	Incremental analysis concerning possible discontinuance of (1) East division and (2) West Division
1	East Division
	Incremental Revenue (1)	(279000)
	Variable Costs
	Cost of Goods sold	(182250)
		(243000*75%)
	Selling and Administrative Expense	(38025)
		(58500*65%)
	Fixed Costs
	Cost of Goods sold	(30375)
		(243000*25%*50%)
	Selling and Administrative Expense	(10238)
		(58500*35%*50%)
	Total Incremental Cost (2)	(260888)
	Incremental Revenue (1-2)	(18113)
2	West Division
	Incremental Revenue (1)	(162000)
	Variable Costs
	Cost of Goods sold	(121500)
		(135000*90%)
	Selling and Administrative Expense	(44100)
		(63000*70%)
	Fixed Costs*
	Cost of Goods sold	(6750)
		(135000*10%*50%)
	Selling and Administrative Expense	(9450)
		(63000*30%*50%)
	Total Incremental Cost (2)	(181800)
	Incremental Revenue (1-2)	19800
	* 50% of both divisions' fixed cost is saved if divisions are discontinued
	As incremental revenue from west division is negative it should be closed. Though overall East division is making
	loss, but it recovers its variable costs and part of its fixed costs. So closing this unit will overall decrease company's
	total net income.
( c)	Columnar condensed income statement for wayne manufacturing
		North		South		East		Aggregate
	Sales	459000		351000		279000		1089000
Less	Variable Costs
	Cost of Goods sold	(189000)		(180000)		(182250)		(551250)
		(270000*70%)		(225000*80%)		(243000*75%)
	Selling and Administrative Expense	(21600)		(36000)		(38025)		(95625)
		(54000*40%)		(72000*50%)		(58500*65%)
	Contribution	248400		135000		58725		442125
Less	Fixed Cost
	Cost of Goods sold	(81000)		(45000)		(60750)		(186750)
		(270000*30%)		(225000*20%)		(243000*25%)
	Selling and Administrative Expense	(32400)		(36000)		(20475)		(88875)
		(54000*60%)		(72000*50%)		(58500*35%)
	Fixed cost portion of west division	(5400)		(5400)		(5400)		(16200)
	to be allocated between all divisions
	on equal basis (16200/3)
	Net Income	129600		48600		(27900)		150300