Question

Ribeiro Manufacturing Company has four operating divisions. During the first quarter of 2016, the company reported aggregate income from operations of $145,000 and the following divisional results:

See table for division sales, COGS, S&A expenses etc. at: https://www.solutioninn.com/ribeiro-manufacturing-company-has-four-operating-divisions-during-the-first

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 (III and IV). Consensus is that the company should discontinue one or both of these divisions.
Instructions
(a) Calculate the contribution margin for divisions III and IV.
(b) Prepare an incremental analysis for the possible discontinuance of (1) division III and (2) division IV. What course of action do you recommend for each division?
(c) Prepare a condensed income statement in columns for Ribeiro Manufacturing, assuming division IV is eliminated.
Use the CVP format. Division IV's unavoidable fixed costs are allocated equally to the continuing divisions.
(d) Reconcile the total income from operations of ($145,000) with the total income from operations without division IV.

Answer 1

(a)

	Division
	III		IV
Sales		310000		180000
Less: Variable Costs
Cost of goods sold *	202500		135000
Selling and Admn.***	42250		49000
Total variable costs		244750		184000
Contribution margin		65250		-4000
Contribution margin (%)		21%		-2%
Less: Fixed expenses
Cost of goods sold **	67500		15000
Selling and Admn.****	22750		21000
Total fixed expenses		90250		36000
Profit		-25000		-40000

(b)

(1) Division III is closed.

	Current	Division III	Incremental
	Position	is closed
Sales	1390000	1080000	-310000
Less: Variable Costs
Cost of goods sold *	772500	570000	-202500
Selling and Admn.***	155250	113000	-42250
Total variable costs	927750	683000	-244750
Contribution margin	462250	397000	-65250
Contribution margin (%)	33%	37%	21%
Less: Fixed expenses
Cost of goods sold **	197500	163750	-33750
Selling and Admn.****	119750	108375	-11375
Total fixed expenses	317250	272125	-45125
Profit	145000	124875	-20125
This is because the total fixed cost of the East division is 90,250
of which only 50% i.e., 45,125 is saved. Curretly the east disivion
is contributing $65,250 towards fixed costs.Therefore there will be
a deficit of $20,125 ($65,250 - $45,125)

(2) Dividion IV is closed.

	Current	Division IV	Incremental
	Position	is closed
Sales	1390000	1210000	-180000
Less: Variable Costs	0
Cost of goods sold *	772500	637500	-135000
Selling and Admn.***	155250	106250	-49000
Total variable costs	927750	743750	-184000
Contribution margin	462250	466250	4000
Contribution margin (%)	33%	37%	21%
Less: Fixed expenses	0
Cost of goods sold **	197500	190000	-7500
Selling and Admn.****	119750	109250	-10500
Total fixed expenses	317250	299250	-18000
Profit	145000	167000	22000
This is because the contribution margin of West division is negative
of $4,000 , i.e., the divison is not able to meet its varibale costs from
sales. Therefore the company will gain if the West divison is closed.

(c)

	I		II		III		Total
Sales		510000		390000		310000		1210000
Less: Variable Costs
Cost of goods sold *	210000		225000		202500		637500
Selling and Admn.***	24000		40000		42250		106250
Total variable costs		234000		265000		244750		743750
Contribution margin		276000		125000		65250	466250	466250
Contribution margin (%)		54.12%		32.05%		21.05%		38.53%
Less: Fixed expenses
Cost of goods sold **	92500		27500		70000		190000
Selling and Admn.****	39500		43500		26250		109250
Total fixed expenses		132000		71000		96250		299250
Profit		144000		54000		-31000		167000

(d)

Total income from operation with four divisions	145000
Add: negative contribution of division IV	4000
	149000
Add: 50% of fixed expenses of division IV saved	18000
Total income from operations without division IV	167000