Question

Culver Company has four operating divisinns. During the first quarter of 2017, the company reported aggregate income from operations of $205,100 and the following divisional results. II Division III $199,000 $499,000 191,000 298,000 63,000 63,000 S (56,000) $138,000 $750,000 198,000 74,900 S (22,900) Cost of goods sold Selling and administrative expenses Income (lees) frur operations IV $446,000 254,000 46,0IDD $146,00D Analysis reveals the following percentages of variable costs in each division. Cost of goods sold Selling and administrative expenses I 69% 41 11 90% 62 80% 52 TV 74% 5 Discontinuance of any division would save 50% of the fixed costs and expenses for that division. Top management is very concerned about the un profileble divisions (I and II). Consensus is the one or both of the divisions should be discontinued. Compute the contribution margin for Divisions and It (Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (15).) Division I Division II Contribution margin Prepare an incremental analysis concerning the possible discontinuance of Division I. (Round answers to O decimal places, e.g. 1525. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Continue eliminate Net Income Increase (Decrease) Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Incone fless) from operations Prepare an incremental analysis concerning the possible discontinuance of Division II. (Round answers to parentheses e.g. (45).) decimal places, e.g. 1525. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or

Answer 1

First of all we will calculate part of fixed and variable cost:

Calculation variable and fixed part of cost variable Cost: I I I 0 1 . Cost of good sold 1,36,620 171,900/238,400 /187,960 2. Selling and adm. 30,709 39,060 32,760 26,680 E Total 11,6 7,329 210960/271,160/214,640 . Fixed Lost: 1. Cost of good sold (61380 19,100 59,600/66,040 2. Selling and adm. 44,191 23,940 30240 19320 105,571| 43,040 89,840 85360 Total

Calculation of contribution of various divisons:

Salls (-) Variable cost contribution (-) Fixed cost Bofit | (Loss) 250.000 198,000 499,000 446,000 (1,67,329) (210,960 (271,166) (214,640) 82,671 (12,960) 227,840 231,360 |(105,591) (43,040) | (89, 840) (85, 360) (22,900) (56,000 138,000 146000

So contribution for divison 1 =$82,671 and Divison 2 =($12,960)

If divison 1 is discontinued :we can see that loss is increasing

le it will reduce division I is discontinued fixed cost by solos And as it is discontinue variable cost will beo Eliminate €52,786) Net Increase / (Decres (135457) I continue Contribution 82,671 Fixed cost Cost of goodsold 61,380 Selling and ad. u4, 191 Totae fixed. 105,571 30,690 22.096 52,786 (30,690) (22,096) (52,786) Income ( loss) (22,900) I (52,786) (29886)

here net increase in loss is showed as a negative figure , so as to show that it is the incremental amount of overall loss

If divison 2 is discontinued: we can see that loss is decreasing

Continue (12,960) Eliminate I(21) 520) Net Increase / (Decrease (8560) contribution Fixed cost Cost of good sold Selling and ad. Total Fixed. 19,100 23,940 43,040 L 9,55o . 11,970 I 21,520 (asso) (11,970) (21,820) Income I loss) (56,000) (21,520) ! 34 480

Here net decreasein loss is showed as a positive figure , so as to show that it is the incremental amount of profit that has reduced the loss.

I will recommend that

Divison 1 =continue, because if we discontinue it, loss in increasing by $29,886 so we should continue it.

Divison 2 = discontinue, because there is a profit of $34,480 if we discontinue it and loss also gets reduced by this amount.

so , after comparing both situations , it is clear that we should take this decision.

If divison 2 is discontinued and unavoidable cost is equally divided among 3 divisons:

I II Total sales 250,000 499.000 446,000 1,195,000 Variable cost cost of goods sold 1,36,620/238,400 187,960 562,980 Selling and adm. 30709 32,760 26,680 90,149 lotal variable cost 1,67,329 271,160 214,640 653,129 Contribution 82,671 227,840 231360 541,871 Fixed Cost cost of good sold. " | 64563 62,183 69,224/196,590 selling and adm. 48,181 | 34,230 23310/105, 1721 Total Fixed cost 112,744 97013 9 2,534 302,291 Income (Loss) (30,073) 130,827/138,826239580

Working note for calculation of 1 and 2

1.calculation of new fixed cost of goods sold:

T. Fixed cost of Fixed cost of goodsold 61,380 (89,600 66040 + Unavoidable cost 3,183 3183 3184 | of 9550 Total new Fixed 64,563 62783/69,224 Cost goods sold

Here unavoidable cost of 9,550 is equally divided in all . that is (9,550/3)

2.calculation of new fixed selling and administrative cost:

T 2. 30240 39.90 19320 3990 fixed selling cost 44191 - tunavoldable Cost 3990 New Fixed selling 48,181 Cost 24 230 22310

Here unavoidable cost of 11,970 is equally divided in all . that is (11,970/3)