Ribeiro Manufacturing Company has four operating divisions. During the first qua

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.

Explanation / Answer

(a)

(b)

(1) Division III is closed.

(2) Dividion IV is closed.

(c)

(d)

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

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