Gutierrez Company has four operating divisions. During the first quarter of 2014
ID: 2381763 • Letter: G
Question
Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $220,000 and the following divisional results.Division I II III IV Sales revenue $254,000 $185,000 $494,000 $446,000 Cost of goods sold 186,000 194,000 295,000 251,000 Selling and administrative expenses 72,000 60,300 55,700 45,000 Income (loss) from operations $(4,000 ) $(69,300 ) $ 143,300 $150,000
Analysis reveals the following percentages of variable costs in each division.
I II III IV Cost of goods sold 75 % 90 % 80 % 75 % Selling and administrative expenses 40 70 50 60
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 (I and II). Consensus is that one or both of the divisions should be discontinued. Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $220,000 and the following divisional results.
Division I II III IV Sales revenue $254,000 $185,000 $494,000 $446,000 Cost of goods sold 186,000 194,000 295,000 251,000 Selling and administrative expenses 72,000 60,300 55,700 45,000 Income (loss) from operations $(4,000 ) $(69,300 ) $ 143,300 $150,000
Analysis reveals the following percentages of variable costs in each division.
I II III IV Cost of goods sold 75 % 90 % 80 % 75 % Selling and administrative expenses 40 70 50 60
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 (I and II). Consensus is that one or both of the divisions should be discontinued. Division I II III IV I II III IV Division I Division II
Division I
Continue
Eliminate Net Income
Increase
(Decrease)
Division II
Continue
Eliminate Net Income
Increase
(Decrease) Problem 26-4A (Part Level Submission) Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $220,000 and the following divisional results.
Division I II III IV Sales revenue $254,000 $185,000 $494,000 $446,000 Cost of goods sold 186,000 194,000 295,000 251,000 Selling and administrative expenses 72,000 60,300 55,700 45,000 Income (loss) from operations $(4,000 ) $(69,300 ) $ 143,300 $150,000
Analysis reveals the following percentages of variable costs in each division.
I II III IV Cost of goods sold 75 % 90 % 80 % 75 % Selling and administrative expenses 40 70 50 60
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 (I and II). Consensus is that one or both of the divisions should be discontinued. (a) Your answer is correct. Compute the contribution margin for Divisions I and II.
Division I Division II Contribution margin $ $
(b) Prepare an incremental analysis concerning the possible discontinuance of Division I and Division II.
Division I
Continue
Eliminate Net Income
Increase
(Decrease) Contribution margin $ $ $ Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations $ $ $
Division II
Continue
Eliminate Net Income
Increase
(Decrease) Contribution margin $ $ $ Fixed costs
Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations $ $ $
What course of action do you recommend for each division?
Division I should be Division II should be
Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $220,000 and the following divisional results. Analysis reveals the following percentages of variable costs in each division. 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 (I and II). Consensus is that one or both of the divisions should be discontinued.
Explanation / Answer
Hi,
Please find the answer as follows:
Part B:
Division 1 should be Continued.
Division 2 should be Discontinued.
Notes:
Fixed cost under Eliminate for Both the Divisions is Calculated as follows:
Division 1
Division 2
Thanks.
Increase/Decrease (B) - (A) Contribution margin 85700 0 -85700 Fixed costs
Cost of goods sold (186000*25%) 46500 23250 -23250 Selling and administrative (72000*60%) 43200 21600 -21600 Total fixed expenses 89700 44850 -44850 Income (loss) from operations -4000 -44850 -40850
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