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

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

Solution a:

Solution b:

As there is incremental loss of $18,112.50 on discontinuance, therefore East division should not be discontinued.

As there is incremental benefit of $19,800 on discontinuance, therefore West division should be discontinued.

Solution c:

Identification of Variable & Fixed Cost Particulars North South East West Cost of Goods Sold: Total cost of goods sold $270,000.00 $225,000.00 $243,000.00 $135,000.00 % of variable COGS 70% 80% 75% 90% Variable COGS $189,000.00 $180,000.00 $182,250.00 $121,500.00 Fixed COGS $81,000.00 $45,000.00 $60,750.00 $13,500.00 Selling & Administrative Expense: Total Selling & Adminstrative Expense $54,000.00 $72,000.00 $58,500.00 $63,000.00 % of Variable Cost 40% 50% 65% 70% Variable Selling & Administrative Expense $21,600.00 $36,000.00 $38,025.00 $44,100.00 Fixed Selling& Administrative Expense $32,400.00 $36,000.00 $20,475.00 $18,900.00

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