Question

Problem 7-5 (Part Level Submission) Pina Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $212,300 and the following divisional results. Division I II III IV Sales $254,000 $199,000 $501,000 $443,000 Cost of goods sold 204,000 190,000 301,000 247,000 Selling and administrative expenses 69,700 61,000 57,000 55,000 Income (loss) from operations $ (19,700) $ (52,000) $143,000 $141,000 Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 67 % 90 % 82 % 75 % Selling and administrative expenses 39 62 50 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.

(a) Your answer is correct. Compute the contribution margin for Divisions I and II. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Division I Division II Contribution margin $ $ SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 15 used

(b1) Your answer is partially correct. Try again. Prepare an incremental analysis concerning the possible discontinuance of Division I. (Round answers to 0 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 Income (loss) from operations $ $ $

Answer 1

(a) Compute the contribution margin for Divisions I and II.
					Division I		Division II
		Sales			$254,000		$199,000
		Variable costs
		Cost of goods sold			136,680	204000*0.67	171,000	190000*0.9
		Selling and administrative			27,183	69700*0.39	37,820	61000*0.62
		Total variable expenses			163,863		208,820
		Contribution margin			$90,137		($9,820)
(b)(1) Prepare an incremental analysis concerning the possible discontinuance of Division I.
		Division I			Continue	Eliminate	Net Income Increase (Decrease)
										Contribution margin (above)			$90,137	$0	($90,137)
										Fixed costs
		Cost of goods sold			67,320	33,660	(33,660)
		Selling and administrative			42,517	21,259	(21,259)
		Total fixed expenses			109,837	54,919	(54,919)
		Income (loss) from operations			($19,700)	($54,919)	($35,219)
		Notes:
204000*(1-0.67)	67,320
69700*(1-0.39)	42,517
(204000*(1-0.67))*0.5	33,660
(69700*(1-0.39))*0.5	21,259