Problem 7-5A (Part Level Submission) (a) Problem 7-5A (Part Level Submission) Gu
ID: 2498398 • Letter: P
Question
Problem 7-5A (Part Level Submission)
(a)
Problem 7-5A (Part Level Submission)
Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $201,700 and the following divisional results.Division I II III IV Sales $246,300 $197,100 $502,500 $446,900 Cost of goods sold 195,400 190,300 298,000 254,600 Selling and administrative expenses 76,500 64,500 61,100 50,700 Income (loss) from operations $ (25,600) $ (57,700) $143,400 $141,600
Analysis reveals the following percentages of variable costs in each division.
I II III IV Cost of goods sold 76% 88% 81% 75% Selling and administrative expenses 39% 70% 52% 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.
Explanation / Answer
Statement showing computations Particulars DivisionI DivisionII Sales 246,300.00 197,100.00 Variable Expenses: Cost of goods sold Division I - 195,400* 76% Division II -190,300 *88% 148,504.00 167,464.00 Selling and administrative expenses Division I - 76,500*39% Division II - 64,500 * 70% 29,835.00 45,150.00 Total Variable Cost 178,339.00 212,614.00 Contribution Margin =Sales - Variable Cost 67,961.00 (15,514.00)