Panda Corporation has four operating divisions. During the fi rst quarter of 201
ID: 2486454 • Letter: P
Question
Panda Corporation has four operating divisions. During the fi rst quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional results shown below.
Division I II III IV
Sales $510,000 $400,000 $310,000 $170,000
Cost of goods sold 300,000 250,000 270,000 156,000
Selling and administrative expenses 60,000 80,000 75,000 70,000
Income (loss) from operations $150,000 $ 70,000 $ (35,000) $(56,000)
Analysis reveals the following percentages of variable costs in each division.
I II III IV
Cost of goods sold 70% 80% 70% 90%
Selling and administrative expenses 40 50 60 70
Discontinuance of any division would save 50% of the fi xed costs and expenses for that division. Top management is very concerned about the unprofi table divisions (III and IV). Consensus is that one or both of the divisions should be discontinued. Instructions
(a) Compute the contribution margin for Divisions III and IV.
(b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division III and (2) Division IV. What course of action do you recommend for each division?
Explanation / Answer
Panda Corporation All Amounts in $ (a) Division Wise Contribution Margin Working Division Division Division Division Total I II III IV Sales 510000 400000 310000 170000 1390000 Variable Cost of Goods Sold 210000 200000 189000 140400 739400 Variable Selling and Admin Expenses 24000 40000 45000 49000 158000 Contribution Margin 276000 160000 76000 -19400 492600 Fixed Cost of Goods Sold 90000 50000 81000 15600 236600 Fixed Selling and Admin Expenses 36000 40000 30000 21000 127000 Net Income 150000 70000 -35000 -56000 129000 (b) Incremental Net Income Analysis for Division III Reduction on Fixed Costs Fixed Cost of Goods Sold 40500 Fixed Selling and Admin Expense 15000 Net Increase in Income 55500 Incremental Net Income Analysis for Division IV Reduction on Fixed Costs Fixed Cost of Goods Sold 7800 Fixed Selling and Admin Expense 10500 Net Increase in Income 18300 Division III should be discountinued since the increase in Net Income is $ 55,500 on its discontinuance. However, Division IV can be continued, since the Net Increase in Income is not substantial.
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