Okoboji Company manufactures wooden canoes, and has four operating divisions: East, West, North, and South. Each...
Okoboji Company manufactures wooden canoes, and has four operating divisions: East, West, North, and South. Each division manufactures a unique model of canoe. During the first quarter of 2017, total net operating income was $70,000. A breakdown by division was as follows:
|
East |
West |
North |
South |
|
|
Sales |
$ 550,000 |
$750,000 |
$950,000 |
$450,000 |
|
COGS |
460,000 |
480,000 |
575,000 |
400,000 |
|
S & A expenses |
120,000 |
220,000 |
250,000 |
125,000 |
|
Net Op. Income |
$ ( 30,000) |
$ 50,000 |
$125,000 |
$ (75,000) |
An internal cost analysis estimated that variable costs represented the following percentages of COGS and Selling/Administrative expenses in each division:
|
East |
West |
North |
South |
|
|
COGS |
70% |
85% |
75% |
60% |
|
S & A expenses |
50% |
60% |
65% |
75% |
Management is concerned about the two unprofitable divisions. Shutting down any division would eliminate about 60% of the fixed costs in that division.
(YOU SHOULD ANSWER THOSE QUESTIONS BELOW ACCORDING TO INFORMATION IS GIVEN ABOVE )
THANKS
1. Complete the following table to calculate the Contribution margin of each division.
|
East |
West |
North |
South |
|
|
Sales |
$ 550,000 |
$750,000 |
$950,000 |
$450,000 |
|
Variable costs |
|
|
|
|
|
Cont. margin |
|
|
|
|
|
Fixed costs |
||||
|
Net Op. Income |
2. Calculate the contribution margin ratio for each division.
3. Prepare separate schedules showing by how much (in dollars) companywide net operating income would increase or decrease as a result of shutting down each unprofitable division. First show the results of closing the South division only, then closing the East division only. Finally, show the results of closing both divisions.
4. Now assume that if the South division were eliminated, some of its customers would purchase canoes from the East division. Sales of the East division would rise to $600,000. Calculate the companywide net operating income after factoring in the closure of the South division and the new higher sales of the East division.
5. What others factors should be considered before the company shuts down any division?
Homework Answers
1)
| East | West | North | South | Total | |
| Sales | $ 550,000.00 | $ 750,000.00 | $ 950,000.00 | $ 450,000.00 | $ 2,700,000.00 |
| Variable costs | $ 382,000.00 | $ 540,000.00 | $ 593,750.00 | $ 333,750.00 | $ 1,849,500.00 |
| Cont. margin | $ 168,000.00 | $ 210,000.00 | $ 356,250.00 | $ 116,250.00 | $ 850,500.00 |
| Fixed costs | $ 198,000.00 | $ 160,000.00 | $ 231,250.00 | $ 191,250.00 | $ 780,500.00 |
| Net Op. Income | $ (30,000.00) | $ 50,000.00 | $ 125,000.00 | $ (75,000.00) | $ 70,000.00 |
Working Note-
| East | West | North | South | |
| COGS | $ 460,000.00 | $ 480,000.00 | $ 575,000.00 | $ 400,000.00 |
| S & A expenses | $ 120,000.00 | $ 220,000.00 | $ 250,000.00 | $ 125,000.00 |
| COGS | 70% | 85% | 75% | 60% |
| S & A expenses | 50% | 60% | 65% | 75% |
| Variable cost | ||||
| COGS | $ 322,000.00 | $ 408,000.00 | $ 431,250.00 | $ 240,000.00 |
| S & A expenses | $ 60,000.00 | $ 132,000.00 | $ 162,500.00 | $ 93,750.00 |
| Total | $ 382,000.00 | $ 540,000.00 | $ 593,750.00 | $ 333,750.00 |
| Fixed Cost | ||||
| COGS | $ 138,000.00 | $ 72,000.00 | $ 143,750.00 | $ 160,000.00 |
| S & A expenses | $ 60,000.00 | $ 88,000.00 | $ 87,500.00 | $ 31,250.00 |
| Total | $ 198,000.00 | $ 160,000.00 | $ 231,250.00 | $ 191,250.00 |
2)
| East | West | North | South | |
| Sales | 550,000.00 | 750,000.00 | 950,000.00 | 450,000.00 |
| Cont. margin | 168,000.00 | 210,000.00 | 356,250.00 | 116,250.00 |
| Cont. margin ratio | 0.31 | 0.28 | 0.38 | 0.26 |
3)
| Closing of South Division | |||||
| East | West | North | South | Total | |
| Sales | 550,000.00 | 750,000.00 | 950,000.00 | - | 2,250,000.00 |
| Variable costs | 382,000.00 | 540,000.00 | 593,750.00 | - | 1,515,750.00 |
| Cont. margin | 168,000.00 | 210,000.00 | 356,250.00 | - | 734,250.00 |
| Fixed costs | 198,000.00 | 160,000.00 | 231,250.00 | 76,500.00 | 665,750.00 |
| Net Op. Income | (30,000.00) | 50,000.00 | 125,000.00 | (76,500.00) | 68,500.00 |
| Closing of East Division | |||||
| East | West | North | South | Total | |
| Sales | 750,000.00 | 950,000.00 | 450,000.00 | 2,150,000.00 | |
| Variable costs | 540,000.00 | 593,750.00 | 333,750.00 | 1,467,500.00 | |
| Cont. margin | 210,000.00 | 356,250.00 | 116,250.00 | 682,500.00 | |
| Fixed costs | 79,200.00 | 160,000.00 | 231,250.00 | 191,250.00 | 661,700.00 |
| Net Op. Income | (79,200.00) | 50,000.00 | 125,000.00 | (75,000.00) | 20,800.00 |
| Closing of South & East Division | |||||
| East | West | North | South | Total | |
| Sales | 750,000.00 | 950,000.00 | 1,700,000.00 | ||
| Variable costs | 540,000.00 | 593,750.00 | 1,133,750.00 | ||
| Cont. margin | 210,000.00 | 356,250.00 | - | 566,250.00 | |
| Fixed costs | 79,200.00 | 160,000.00 | 231,250.00 | 76,500.00 | 546,950.00 |
| Net Op. Income | (79,200.00) | 50,000.00 | 125,000.00 | (76,500.00) | 19,300.00 |
4)
| Closing of South Division and increase in Sale | |||||
| East | West | North | South | Total | |
| Sales | 600,000.00 | 750,000.00 | 950,000.00 | 2,300,000.00 | |
| Variable costs | 416,727.27 | 540,000.00 | 593,750.00 | 1,550,477.27 | |
| Cont. margin | 183,272.73 | 210,000.00 | 356,250.00 | - | 749,522.73 |
| Fixed costs | 198,000.00 | 160,000.00 | 231,250.00 | 76,500.00 | 665,750.00 |
| Net Op. Income | (14,727.27) | 50,000.00 | 125,000.00 | (76,500.00) | 83,772.73 |
5) Below are the factors should be considered before the company shuts down any division-
- Future Prospects of the division.
- Seasonal Low of Sales, sometimes some product are sold depending on the months. Say for example woolen clothes are sold in winter season.
- Political situation in the country
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