Prepare an incremental analysis concerning the possible discontinuance of Divisi
ID: 2449639 • Letter: P
Question
Prepare an incremental analysis concerning the possible discontinuance of Division II,III,VI
Brislin Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $231,300 and the following divisional results. Analysis reveals the following percentages of variable costs in each division. 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 (I and II). Consensus is that one or both of the divisions should be discontinued. Q Your answer is correct. Compute the contribution margin for Divisions I and II. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Prepare an incremental analysis concerning the possible discontinuance of Division I. (Round answers to 0 decimal places, e.g. 1525. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)Explanation / Answer
Prepare an incremental analysis concerning the possible discontinuance of Division II,III,VI Brislin Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $213,000 and the following divisional results. I II III IV Sales $253,000 $195,000 $502,000 $449,000 Cost of goods sold 197,000 190,000 295,000 246,000 Selling and administrative expenses 75,700 57,000 60,000 47,000 Income (loss) from operations ($19,700) ($52,000) $147,000 $156,000 Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 67% 89% 81% 73% Selling and administrative expenses 37% 62% 48% 59% 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 (I and II). Consensus is that one or both of the divisions should be discontinued. Solution: Contribution Margin for Divisions I and II I II Sales $253,000 $195,000 Variable costs Cost of goods sold 131,990 169,100 Division I -197,000*67% Division II - 190,000*89% Selling and administrative expenses 28009 35340 Division I - 75700*37% Division II - 57,000*62% Total variable expenses 159,999 204,440 Contribution margin = Sales - Total variable expenses Contribution margin Dvision I = 253000 - 159,999 Contribution margin Dvision II = 195,000 - 204,440 $93,001 ($9,440) Contribution margin is what is available to pay fixed costs. Eliminating Division II gives us a negative contribution margin. However, if we can decrease fixed cost below $9,440, the elimination would still be a good idea. Incremental analysis concerning the possible discontinuance of Division I and Division II. Division I Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) $ 93,001 $ - $ (93,001) Fixed costs Cost of goods sold 65,010 32,505 32505 Division I -197,000*67% = 131,990 = 197,000-131,990 Selling and administrative 47,691 23845.5 23,846 Division I - 75700*37% = 28009 = 75,700-28009 Total fixed expenses 112,701 56350.5 56350.5 Income (loss) from operations ($19,700) ($56,351) $ (36,651) Eliminating Division One would reduce income by $36,651 – not a good idea! Division II Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) $ (9,440) $ - $ 9,440 Fixed costs Cost of goods sold 20,900 10,450 10450 Division II - 190,000*89% = 169,100 = 190,000-169,100 Selling and administrative 21,660 10830 10,830 Division II - 57,000*62% = 35340 =57000-35340 Total fixed expenses 42,560 21280 21,280 Income (loss) from operations ($52,000) ($21,280) $ 30,720 Division II should be eliminated as income from operations would increase by $30,720 by so doing. Contribution Margin for Divisions III and IV III IV Sales $502,000 $449,000 Variable costs Cost of goods sold 141,600 179,580 Division III -295,000*81% Division IV - 246,000*73% Selling and administrative expenses 28800 27730 Division III -60000*48% Division IV - 47,000*59% Total variable expenses 170,400 207,310 Contribution margin = Sales - Total variable expenses Contribution margin Dvision III = 502000 - 170,400 Contribution margin Dvision IV = 449,000 - 207,310 $331,600 $241,690 Contribution margin is what is available to pay fixed costs. Eliminating Division IV gives us a decrease contribution margin. However, if we can increase fixed cost below $241,690, the elimination would still be a good idea. Incremental analysis concerning the possible discontinuance of Division III and Division IV. Division III Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) $ 331,600 $ - $ (331,600) Fixed costs Cost of goods sold 65,010 32,505 32505 Division III -295,000*81% = 141,600=295,000-141,600 Selling and administrative 31,200 15600 15,600 Division III -60000*48%=28800=60000-28800 Total fixed expenses 96,210 48105 48,105 Income (loss) from operations $0 ($48,105) $ (283,495) Eliminating Division III would reduce income by $283,495 – not a good idea! Division IV Continue Eliminate Net Income Increase (Decrease) Contribution margin (above) $ 241,690 $ - $ (241,690) Fixed costs Cost of goods sold 66,420 33,210 33210 Division IV - 246,000*73%=179,580 = 246,000-179,580 Selling and administrative 19,270 9635 9,635 Division IV - 47,000*59% = 27730 =47000-27730 Total fixed expenses 85,690 42845 42,845 Income (loss) from operations $0 ($42,845) $ (198,845) Division IV should be eliminated as income from operations would decrease by $198,845 by so doing.