Wayne Manufacturing Company has four operating divisions. During the first quart
ID: 2548120 • 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.
Computation of contribution Margin of East and West Division.
Division
East ($)
West ($)
Sales Revenue variable (A)
279,000
162,000
Cost of Goods Sold Variable(B)
182,250
12,1500
Selling And Administrative Expenses © (Variable)
38,025
44,100
Contribution Margin(A-B-C)
58,725
(3,600)
Note:
Contribution Margin= Sales revenue- Variable cost of goods sold-Variable cost of selling and Administration.
Variable cost = Total cost* percentage variability
b.
Situation -1
If East Division Discontinued.
Computation Of Remaining Fixed cost after Discontinuing East Division.
Total Fixed Portion on Cost of goods sold=$243,000*25%=$60,750
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion of cost of goods sold charged against other divisions= $60,750*50= $30,375
Equally portioned by three remaining unit= $30,375/3=$10,125
Total Fixed Portion on Selling and Administration=$58,500*35%=$20,475
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion of selling and administration cost charged against other divisions= $20,475*50%=10,238
Equally portioned by three remaining unit= $10238/3=$3,412
Table Showing Incremental analysis report on the Decision.
Division
North ($)
South ($0
West ($)
Sales (A)
459,000
351,000
162,000
Cost of goods sold (B)
270,000
225,000
135,000
Distribution Fixed portion of cost of goods sold of Discontinued Unit to existing unit Equally. ©
10,125
10,125
10,125
Selling And Administrative expense (D)
54,000
72,000
63,000
Distribution Fixed portion of selling and Administration of Discontinued Unit to existing unit Equally. (E)
3,412
3,412
3,412
Income (loss) (A-B-C-D-E)
121,463 (F)
40,463 (G)
-49,537(H)
Aggregate Net income = $112,389. (F+G+H)
If West Divisionism Discontinued.
Computation Of Remaining Fixed cost after Discontinuing East Division.
Total Fixed Portion on Cost of goods sold=$135,000*10%=13,500
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion iof cost of goods sold charged against other divisions= 13500*50= 6750
Equally portioned by three remaining unit= $6,750/3=$2,250
Total Fixed Portion on Selling and Administration=$63,000*30%=$18,900
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion of selling and administration cost charged against other divisions= $18,900*50%=9,450
Equally portioned by three remaining unit= $9,450/3=$3,150
Division
North($)
South($)
east ($)
Sales (A)
459,000
351,000
279,000
Cost of goods sold (B)
270,000
225,000
243,000
Distribution Fixed portion of cost of goods sold of Discontinued Unit to existing unit Equally. ©
2,250
2,250
2,250
Selling And Administrative expense (D)
54,000
72,000
58,500
Distribution Fixed portion of selling and Administration of Discontinued Unit to existing unit Equally. (E)
3,150
3,150
3,150
Income (loss) (A-B-C-D-E)
129,600 (F)
48,600 (G)
-27,900 (H)
Net Aggregate Income (F+G+H0=150300
Discontinuing Both East And West Division.
Computation Of Remaining Fixed cost after Discontinuing East and West Division.
Total Fixed Portion on Cost of goods sold(east)=$243,000*25%=$60,750
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion if cost of goods sold charged against other divisions (East)= $60,750*50= $30,375
Total Fixed Portion on Cost of goods sold (West)=135000*10%=13500
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion iof cost of goods sold charged against other divisions (west)= 13500*50= 6750
Total Remaining Fixed cost Expense on both Division=6750+30375= 37125
Equally portioned by three remaining unit= $37,125/3=$12,375
Total Fixed Portion on Selling and Administration (East)=$58,500*35%=$20,475
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion iof selling and administration cost charged against other divisions (East)= $20,4758*50%=$10,238
Total Fixed Portion on Selling and Administratioin (West)=$63,000*30%=$18900
As 50% of fixed expense can avoided by discontinuing the Division the Remaining portion of selling and administration cost charged against other divisions (West)= 18900*50%=9450
Total remaining Fixed Selling and Distribution expense of both division= $10,238+$9,450=$19,688
Company
North ($)
South
Sales
459,000
351,000
Cost of goods sold
270,000
225,000
Distribution Fixed portion of cost of goods sold of Discontinued Unit to exsisting unit Equally.
185,62.5
18,562.5
Selling And Administrative expense
54,000
72,000
Distribution Fixed portion of selling and Administration of Discontinued Unit to exsisting unit Equally.
9,844
98,44
Income (loss)
106,593.5
255,93.5
Net Aggregate income= 132187
Incremental Analysis.
Situation
Aggragate net income
Before discontinuing both division
130,500
After discontinuing East division
112,389
After Discontinuing west division
150,300
After Discontinuing Both Division
132,187
Conclusion :
Its is better discontinue west division only because this decision gives the higehst net income for the company comparing to others.
C.income statement.
North
South
East
Aggregate
Sales
459,000
351,.000
279,000
1089,000
Variable Cost
Cost of Goods Sold
189,000
18,0000
182,250
551,250
Selling and Admin cost
21,600
36,000
38,025
95,625
Contribution Margin
248,400
135,000
58,725
442,125
Fixed Cost
Cost of Goods Sold
83,250
47,250
63,000
193,500
Selling and admin cost
35,550
39,150
23,625
98,325
Net operating income
129,600
48,600
-27900
150300
Division
East ($)
West ($)
Sales Revenue variable (A)
279,000
162,000
Cost of Goods Sold Variable(B)
182,250
12,1500
Selling And Administrative Expenses © (Variable)
38,025
44,100
Contribution Margin(A-B-C)
58,725
(3,600)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.