Wayne Manufacturing Company has four operating divisions. During the first quart
ID: 2547955 • Letter: W
Question
Wayne Manufacturing Company has four operating divisions. During the first quarter of 2016, the company reported the divisional results shown below and aggregate income shown below. Division: North South East West Aggregate Income Sales $ 459,000 $ 351,000 $ 279,000 $ 162,000 Cost of goods sold 270,000 225,000 243,000 135,000 Selling and administrative expenses 54,000 72,000 58,500 63,000 Income (loss) from operations $ 135,000 $ 54,000 $ (22,500) $ (36,000) $ 130,500 Analysis reveals the following percentages of variable costs in each division. Division: North South East West Cost of goods sold 70% 80% 75% 90% Selling and administrative expenses 40% 50% 65% 70% 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 (East and West). Consensus is that one or both of the divisions should be discontinued. Instructions - Your solutions should be clearly labeled on Solutions of this workbook. (a) Compute the contribution margin for the East and West Divisions. (See illustration 20-17 for guidance, if needed.) (b) Prepare an incremental analysis concerning the possible discontinuance of (1) East Division and (2) West Division. What course of action do you recommend for each division? Should either be closed? (See illustration 20-18 for guidance, if needed.) (c) Prepare a columnar condensed income statement for Wayne Manufacturing, assuming the division(s) that should be eliminated are eliminated. Use the CVP format. Remember: Closed division's unavoidable fixed costs are allocated equally to the continuing divisions. (See Illustrations 20-16 and 20-17 for guidance, if needed.) Wayne Manufacturing Company has four operating divisions. During the first quarter of 2016, the company reported the divisional results shown below and aggregate income shown below. Division: North South East West Aggregate Income Sales $ 459,000 $ 351,000 $ 279,000 $ 162,000 Cost of goods sold 270,000 225,000 243,000 135,000 Selling and administrative expenses 54,000 72,000 58,500 63,000 Income (loss) from operations $ 135,000 $ 54,000 $ (22,500) $ (36,000) $ 130,500 Analysis reveals the following percentages of variable costs in each division. Division: North South East West Cost of goods sold 70% 80% 75% 90% Selling and administrative expenses 40% 50% 65% 70% 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 (East and West). Consensus is that one or both of the divisions should be discontinued. Instructions - Your solutions should be clearly labeled on Solutions of this workbook. (a) Compute the contribution margin for the East and West Divisions. (See illustration 20-17 for guidance, if needed.) (b) Prepare an incremental analysis concerning the possible discontinuance of (1) East Division and (2) West Division. What course of action do you recommend for each division? Should either be closed? (See illustration 20-18 for guidance, if needed.) (c) Prepare a columnar condensed income statement for Wayne Manufacturing, assuming the division(s) that should be eliminated are eliminated. Use the CVP format. Remember: Closed division's unavoidable fixed costs are allocated equally to the continuing divisions. (See Illustrations 20-16 and 20-17 for guidance, if needed.)Explanation / Answer
(a) East Division West Division Sales 279000 162000 Less Variable Costs Cost of Goods sold (182250) (121500) (243000*75%) (135000*90%) Selling and Administrative Expense (38025) (44590) (58500*65%) (63000*70%) Contribution 58725 (4090) (b) Incremental analysis concerning possible discontinuance of (1) East division and (2) West Division 1 East Division Incremental Revenue (1) (279000) Variable Costs Cost of Goods sold (182250) (243000*75%) Selling and Administrative Expense (38025) (58500*65%) Fixed Costs Cost of Goods sold (30375) (243000*25%*50%) Selling and Administrative Expense (10238) (58500*35%*50%) Total Incremental Cost (2) (260888) Incremental Revenue (1-2) (18113) 2 West Division Incremental Revenue (1) (162000) Variable Costs Cost of Goods sold (121500) (135000*90%) Selling and Administrative Expense (44100) (63000*70%) Fixed Costs* Cost of Goods sold (6750) (135000*10%*50%) Selling and Administrative Expense (9450) (63000*30%*50%) Total Incremental Cost (2) (181800) Incremental Revenue (1-2) 19800 * 50% of both divisions' fixed cost is saved if divisions are discontinued As incremental revenue from west division is negative it should be closed. Though overall East division is making loss, but it recovers its variable costs and part of its fixed costs. So closing this unit will overall decrease company's total net income. ( c) Columnar condensed income statement for wayne manufacturing North South East Aggregate Sales 459000 351000 279000 1089000 Less Variable Costs Cost of Goods sold (189000) (180000) (182250) (551250) (270000*70%) (225000*80%) (243000*75%) Selling and Administrative Expense (21600) (36000) (38025) (95625) (54000*40%) (72000*50%) (58500*65%) Contribution 248400 135000 58725 442125 Less Fixed Cost Cost of Goods sold (81000) (45000) (60750) (186750) (270000*30%) (225000*20%) (243000*25%) Selling and Administrative Expense (32400) (36000) (20475) (88875) (54000*60%) (72000*50%) (58500*35%) Fixed cost portion of west division (5400) (5400) (5400) (16200) to be allocated between all divisions on equal basis (16200/3) Net Income 129600 48600 (27900) 150300
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