Question

NHL Manufacturing Company has four operating divisions. During the first quarter of 2020, the company reported total income from operations of $36,000 and the following results for the divisions:

		Division
		Leafs		Jets		Habs		Oilers
Sales		$  405,000		$730,000		$920,000		$500,000
Cost of goods sold		400,000		480,000		576,000		390,000
Selling and administrative expenses		100,000		207,000		246,000		120,000
Income (loss) from operations		$(95,000)		$  43,000		$  98,000		$(10,000)

An analysis reveals the following percentages of variable costs in each division.

		Leafs		Jets		Habs		Oilers
Cost of goods sold		90%		80%		90%		95%
Selling and administrative expenses		60		60		70		80

Closing any division would save 70% of the fixed costs and expenses for that division.

Top management is deeply concerned about the unprofitable divisions (Leafs and Oilers). The consensus is that one or both of them should be eliminated.

Instructions

1. Calculate the contribution margin for the two unprofitable divisions.

2. Prepare an incremental analysis for the possible elimination of (1) the Leafs division and (2) the Oilers division. What course of action do you recommend for each division?

3. Prepare a condensed income statement in columns using the CVP format for NHL Manufacturing Company, assuming (1) the Leafs division is eliminated, and (2) the unavoidable fixed costs and expenses of the Leafs division are allocated 30% to Jets, 50% to Habs, and 20% to Oilers.

d. Compare the total income from operations with the Leafs division ($36,000) versus total income from operations without this division.

Answer 1

a.

	Leafs Division	Oilers Division
Sales Revenue	$ 405,000	$ 500,000
Variable Costs
Variable Cost of Goods Sold	360,000	370,500
Selling and Administrative Expenses	60,000	96,000
Total Variable Costs	420,000	466,500
Contribution Margin	(15,000)	33,500

b. Incremental Analysis of Possible Elimination :

	Leafs Division	Oilers Division
Contribution Margin Lost	$ 15,000	$ ( 33,500)
Avoidable Fixed Expenses
Cost of Goods Sold	28,000	13,650
Selling and Administrative Expenses	28,000	16,800
Total Avoidable Fixed Expenses	56,000	30,450
Increase ( decrease) in Net Operating Income	$ 71,000	$ (3,050)

Recommendations: Leafs Division should be eliminated.

Oilers Division should not be eliminated.

c.

NHL Manufacturing Company CVP Format Income Statement
	Jets	Habs	Oilers	Total
Sales	$ 730,000	$ 920,000	$ 500,000	$ 2,150,000
Variable Expenses
Variable Cost of Goods Sold	384,000	518,400	370,500	1,272,900
Variable Selling and Administrative Expenses	124,200	172,200	96,000	392,400
Total Variable Expenses	508,200	690,600	466,500	1,665,300
Contribution Margin	221,800	229,400	33,500	484,700
Fixed Costs
Cost of Goods Sold	96,000	57,600	19,500	173,100
Selling and Administrative Expenses	82,800	73,800	24,000	180,600
Unavoidable Fixed Costs of Leafs Division	7,200	12,000	4,800	24,000
Total Fixed Expenses	186,000	143,400	48,300	377,700
Net Operating Income	35,800	86,000	(14,800)	107,000

d. Without the Leafs Division, total income is higher by $ 71,000.