Question

P20-5A Prepare incremental analysis concerning elimination of divisions. Brislin Company has four operating divisions. During the first quarter of 2020, the company reported aggregate income from operations of $213,000 and the following divisional results. Division IV Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations $250,000 200,000 75,000 ($25,000) $200,000 192,000 60,000 ($52,000) $500,000 300,000 60,000 $140,000 $450,000 250,000 50,000 $150,000 Analysis reveals the following percentages of variable costs in each division. 90% 75% Cost of good sold Selling and administrative expenses 70% 40 80% 50 60 60 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. (a) Instructions Compute the contribution margin for Division I and II. (b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division? (c) Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated. (Use the CVP format.) Division Il's unavoidable fixed costs are allocated equally to the continuing divisions. Reconcile the total income from operations ($213,000) with the total income from operations without Division II. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". (d)

Answer 1

a) compute the contribution margin for Div I and II Division 1 $ 250,000 Division II $ 200,000 Sales Variable costs Cost of goods sold Selling & Admin exp Total variable expenses Contribution margin $ $ $ $ 140,000 $ 30,000 $ 170,000 $ 80,000 $ 172,800 36,000 208.800 (8,800)

b1 division 1 net income increase Continue eliminate (decrease) Contribution margin $ 80,000 $ - $ (80,000) Fixed costs Cost of goods sold $ 60,000 $ 30,000 $ (30,000) Selling & Admin exp $ 45,000 $ 22,500 $ (22,500) Total fixed expenses $ 105,000 $ 52,500 $ (52.500) Income or loss from operatio: $ (25,000) $ (52,500) $ (27,500) b2 division 2 net income increase Continue eliminate (decrease) Contribution margin $ (8,800) $ $ 8,800 Fixed costs Cost of goods sold $ 19,200 $ 9,600 $ (9,600) Selling & Admin exp $ 24,000 $ 12,000 $ (12,000) Total fixed expenses $ 43,200 $ 21,600 $ (21,600) Income or loss from operatio: $ (52,000) $ (21,600) $ 30,400

Response: The contribution margin from division 1 is postive and it is able to cover part of the fixed costs. So discontinuint div I will have a negative impact of $ 27500 Whereas, since the contribution margin from Div II is already negative and the fixed costs are extra cost to the company. Discontinuing Div II will have a postive impact of $30400.

BRISLIN COMPANY CVP Income statement Divisions liv Total $ 1,200,000 250,000 $ 500,000 $ 450,000 140,000 30,000 170,000 80,000 $ $ $ $ 240,000 $ 187,500 $ 30,000 $ 30,000 $ 270,000 $ 217,500 $ 230,000 $ 232,500 $ 567,500 90,000 657,500 542,500 Sales $ Variable costs Cost of goods sold $ Selling & Admin exp $ Total variable expenses $ Contribution margin $ Fixed costs Cost of goods sold $ Selling & Admin exp $ Fixed costs of Div II Cost of goods sold $ Selling & Admin exp $ Total fixed expenses $ Income or loss from operatiol $ 60,000 $ 45,000 $ 60,000 $ 30,000 $ 62,500 $ 20,000 $ 182,500 95,000 || 3,200 $ 4,000 $ 112,200 $ (32,200) $ 3,200 $ 3,200 $ 4,000 $ 4,000 $ 97,200 $ 89,700 $ 132,800 $ 142,800 $ 9,600 12,000 299,100 243.400

$ 213,000 d) Reconcilation Total income from operations Add: Incremental income on discontinution of Div II (from part b2 above) Net income after discontinution $ 30,400 $ 243,400

Additional question:

The change in cost will not impact the decision as the increase is income is still more than the loss.

Division 11 $ 200,000 Sales Variable costs Cost of goods sold Selling & Admin exp Total variable expenses Contribution margin $ $ $ $ 162,000 45,000 207,000 (7,000) b2 division 2 net income increase Continue eliminate (decrease) Contribution margin $ (7,000) $ - $ 7,000 Fixed costs Cost of goods sold $ 18,000 $ 9,000 $ (9,000) Selling & Admin exp $ 30,000 $ 15,000 $ (15,000) Total fixed expenses $ 48,000 $ 24,000 $ (24,000) Income or loss from operatio: $ (55,000) $ (24,000) $ 31,000