Lewis Manufacturing Company has four operating divisions. During the first quart

Question

Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company Reported aggregate income from operations of $176,000 and the following divisional results.

Division
I II III IV
Sales $250,000 $200,000 $500,000 $400,000
Cost of goods sold 200,000 189,000 300,000 250,000
Selling and administrative expenses 65,000 60,000 60,000 50,000
Income (loss) from operations ($15,000) ($49,000) $140,000 $100,000
Analysis reveals tht following percentages of variable costs in each division.
I II III IV
Cost of goods sold 70% 90% 80% 75%
Selling and adminstrative 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.
Instructions:
a) Compute the contribution margin for Divisions I and II.
b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division?
c) Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II's unavoidable fixed costs are allocated equally to the continuing divisions.
d) Reconcile the total income from opertions ($176,000) with the total income from operations without Division II.

Explanation / Answer

a) Compute the contribution margin for Divisions I and II.
                                    Division I         Division II
Sales                            $250,000         $200,000
Less : Variable costs
          COGS                ($140,000)       ($170,100)
                                        70%                 90%
Less : Selling & Admin. (26,000)          ($42,000)
Contribution Margin    $84,000       ($12,100)
                                  ========================
b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division?

(b) (1)                                                                     Net Income
                                      Continue          Eliminate Increase/Decrease
Contribution Margin         $84,000                0            $84,000
Fixed costs
COGS                              $60,000         $30,000         $30,000
Selling & Admin.             $39,000         $19,500        $19,500  
Total fixed costs             $99,000         $49,000         $49,500
Income/Loss                   ($15,000)      ($49,000)      ($34,500)
                                   ==================================
Elimination of Division I would reduce Lewis Total income by $34,500
         
(b) (2)                                                                     Net Income
                                      Continue          Eliminate Increase/Decrease
Contribution Margin        ($12,100)                0            $12,100
Fixed costs
COGS                              $18,900           $9,450            $9,450
Selling & Admin.             $18,000           $9,000           $9,000   
Total fixed costs             $36,900         $18,450          $49,500  
Income/Loss                   ($49,000)      ($18,450)        $30,550
                                   ===================================
Division II should be eliminated as Lewis total income would increase by $30,550

c) Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II's unavoidable fixed costs are allocated equally to the continuing divisions.

LEWIS MANUFACTURING COMPANY
                                           CVP Income Statement
                              For the Quarter Ended March 31, 2008


                                    Division I       Division III    Division IV
Sales                              $250,000       $500,000      $400,000
Less : Variable costs
COGS                              $140,000      $240,000      $187,500
Selling & Admin.                $26,000       $30,000        $30,000
Total Variable costs         $166,000      $270,000      $217,500

Contribution Margin          $84,000      $230,000      $182,500

Fixed costs
COGS                               $63,150        $63,150       $65,650
Selling & Admin.              $42,000        $33,000       $23,000
Total Fixed costs            $105,150        $96,150       $98,650

Income/(Loss)               ($21,150)      $133,850       $93,850
                                  ================================
d) Reconcile the total income from opertions ($176,000) with the total income from operations without Division II.
Income from operation with Division II            $176,000
Additional Income from from elimination           $30,550
Total                                                             $206,550
                                                                  =========  

                                                                         

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