Problem 7-5 (Part Level Submission) (a) (b1) Problem 7-5 (Part Level Submission)
ID: 2556349 • Letter: P
Question
Problem 7-5 (Part Level Submission)
(a)
(b1)
Problem 7-5 (Part Level Submission)
Riverbed Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $191,000 and the following divisional results.Division I II III IV Sales $250,000 $198,000 $496,000 $443,000 Cost of goods sold 205,000 190,000 297,000 255,000 Selling and administrative expenses 70,000 64,000 61,000 54,000 Income (loss) from operations $ (25,000) $ (56,000) $138,000 $134,000
Analysis reveals the following percentages of variable costs in each division.
I II III IV Cost of goods sold 69 % 89 % 80 % 74 % Selling and administrative expenses 37 61 51 58
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
Continue Eliminate Net Income Increase (Decrease) Contribution margin 82650 0 -82650 Fixed costs: Cost of goods sold 63550 31775 31775 Selling and administrative 44100 22050 22050 Total fixed expenses 107650 53825 53825 Income (loss) from operations -25000 -53825 -28825