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(c)

Indigo Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $218,700 and the following divisional results. Division I II III IV Sales $250,000 $198,000 $499,000 $447,000 Cost of goods sold 195,000 194,000 298,000 250,000 Selling and administrative expenses 70,300 62,000 57,000 49,000 Income (loss) from operations $ (15,300) $ (58,000) $144,000 $148,000
Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 74 % 92 % 78 % 73 % Selling and administrative expenses 37 57 51 59
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

Solution a:

Solution b1:

Solution b2:

Solution b3:

As there is increase in income on elimination of division II, therefore Division II should be eliminated.

Solution c:

Computation of contribution margin for division 1 and II Particulars Division I Division II Sales $250,000.00 $198,000.00 Variable cost: Cost of goods sold $144,300.00 $178,480.00 Selling and administrative expenses $26,011.00 $35,340.00 Contribution margin $79,689.00 -$15,820.00

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