Problem 7-5 (Part Level Submission) Concord Company has four operating divisions
ID: 2555965 • Letter: P
Question
Problem 7-5 (Part Level Submission)
Concord Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $183,700 and the following divisional results.
Division
I
II
III
IV
Sales
$250,000
$198,000
$499,000
$443,000
Cost of goods sold
200,000
194,000
305,000
255,000
Selling and administrative expenses
70,300
62,000
65,000
55,000
Income (loss) from operations
$ (20,300)
$ (58,000)
$129,000
$133,000
Analysis reveals the following percentages of variable costs in each division.
I
II
III
IV
Cost of goods sold
66
%
88
%
81
%
76
%
Selling and administrative expenses
38
57
52
60
Division
I
II
III
IV
Sales
$250,000
$198,000
$499,000
$443,000
Cost of goods sold
200,000
194,000
305,000
255,000
Selling and administrative expenses
70,300
62,000
65,000
55,000
Income (loss) from operations
$ (20,300)
$ (58,000)
$129,000
$133,000
CONCORD COMPANY CVP Income Statement For the Quarter Ended March 31, 2017 DIVISIons IV Total Sales 250000 499000 443000 1192000 Variable costs Cost of goods sold 132000 247050 193800 572850 Selling and administrative 26714 33800 33000 93514 Total variable costs 158714 280850 226800 666364 Contribution margin 91286 218150 216200 525636 Fixed costs Cost of goods sold Selling and administrative Total fixed costs Income (loss) from operationsExplanation / Answer
CONCORD COMPANY
Net loss if division is discontinued
(i.e. 50 % of total fixed cost)
variable cost will be zero as there is no production in given division
If Division II is discontinued, then net income/ (loss) from operations will be
Division I $ (20,300)
Division II $ (24,970)
Division III $ 129,000
Division IV $ 133,000
Total $ 216,730
If Division I is discontinued, then net income/ (loss) from operations will be
Division I $ (55,793)
Division II $ (58,000)
Division III $ 129,000
Division IV $ 133,000
Total $ 148,207
If Both Division I & II are discontinued, then net income/ (loss) from operations will be
Division I $ (55,793)
Division II $ (24,970)
Division III $ 129,000
Division IV $ 133,000
Total $ 181,237
Therefore, since there is an increase in total operating income from all operation in case if division II is discontinued. the option to discontinue only division II shall be viable and opted.
Division I Division II Division III Division IV TOTAL SALES (A) 250,000 198,000 499,000 443,000 VARIABLE COST cost of goods sold 132,000 170,720 247,050 193,800 selling and administrative 26,714 35,340 33,800 33,000 total variable cost (B) 158,714 206,060 280,850 226,800 Total Contribution (A-B) 91,286 (8,060) 218,150 216,200 FIXED COSTS cost of goods sold 68,000 23,280 57,950 61,200 selling and administrative 43,586 26,660 31,200 22,000 total fixed cost 111,586 49,940 89,150 83,200 Income (Loss) from operations (20,300) (58,000) 129,000 133,000 183,700Net loss if division is discontinued
(i.e. 50 % of total fixed cost)
variable cost will be zero as there is no production in given division
55,793 24,970 44,575 41,600