Question

Prepare incremsemtal analysis concerning eimination of P20-5A Brislin Company has four operating divisions. During the first quarter of 2017 the company reported aggregate income from operations of $213,000 and the following divisional results. divisions LO 61, A Division II IV XLS Sales $250,000 $200,000 $500,000 $450,000 Cost of goods sold Selling and administrative expenses 200,000 75.000 192,000 300,000 250,000 50,000 60,000 60,000 Income (loss) from operations- $(52,000) $(25,000) $140,000 $150,000 Analysis reveals the following percentages of variable costs in each division III IV Cost of goods sold Selling and administrative expenses 70% 90% 80% 75% 40 60 50 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), Con sensus is that one or both of the divisions should be discontinued. Continuing Problems 1009 Instructions (a) Compute the contribution margin for Divisions I and II (b) Prepare an incremental analysis concerning the possible discontinuance of (1) Divi sion I and (2) Division II. What course of action do you recommend for each division? (e) Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated. (Use the CVP format.) Division II's unavoidable fixed costs are allocated equally to the continuing divisions. (d) Reconcile the total income from operations ($213,000) with the total income from operations without Division I (a) I$80,000 (c Income Il $132,800

Please help solve P20-5A

Answer 1

a) Contribution Margin

	Division I	Division II
Sales	$250,000	$200,000
Less : Variable Expenses
Cost of Goods Sold	$140,000 ($200,000*70%)	$172,800 ($192,000*90%)
Selling and Administrative Expenses	$30,000 ($75,000*40%)	$36,000 ($60,000*60%)
Contribution Margin	$80,000	$(8,800)

b.i) Incremental Analysis concerning the possible discontinuance of Division I

	Continue	Eliminate	Net Increase (Decrease)
Contribution Margin (a)	$80,000	0	($80,000)
Fixes Costs
Cost of Goods Sold (b)	$60,000 ($200,000*30%)	$30,000 ($60,000*0.5)	$30,000
Selling and Administrative Expenses (c)	$45,000($75,000*60%)	$22,500 ($45,000*0.5)	$22,500
Total Fixed Expenses (d=b+c)	$105,000	$52,500	$ 52,500
Income (Loss) from operations (a-d)	$(25,000)	$(52,500)	$27,500

The Fixed Cost will reduce by 50% after discontinuing the operations of division.

Net Increase in Loss is $27,500.

b.ii) Incremental Analysis concerning the possible discontinuance of Division II

	Continue	Eliminate	Net Increase (Decrease)
Contribution Margin (a)	$ (8,800)	0	$8,800
Fixes Costs
Cost of Goods Sold (b)	$19,200 ($192,000*10%)	$9,600 (19,200*0.5)	$9,600
Selling and Administrative Expenses (c)	$24,000 ($60,000*40%)	$12,000 (24,000*0.5)	$12,000
Total Fixed Expenses (d=b+c)	$43,200	$21,600	$21,600
Income (Loss) from operations (a-d)	$(34,400)	$(21,600)	$(12,800)

Net Decrease in loss is $12,800

Course of action for each division:-

Division I	Continue	As Loss is increasing after discontinuing.
Division II	Discontinue	Loss is decreasing after Discontinuing

c)

BRISLIN Company CVP Income Statement For the Quarter ended March 31,2017
Divisions
	I	III	IV	Total
Sales (a)	$250,000	$500,000	$450,000	$1,200,000
Variable Costs
Cost of Goods Sold (b)	$140,000 ($200,000*0.7)	240,000 (300,000*0.80)	187,500 (250,000*0.75)	567,500
Selling and Administrative Expenses(c)	$30,000 ($75,000*0.4)	30,000 (60,000*0.50)	25,000 (50,000*0.6)	85,000
Total Variable Costs (d=b+c)	$170,000	$270,000	$212,500	652,500
Contribution Margin (e=a-d)	$80,000	$230,000	$237,500	$547,500
Fixed Costs
Cost of Goods Sold (f=Total cost of Goods sold -b)	$60,000 + $6,400	$60,000 + $6,400	$62,500 + $6,400	$201,700
Selling and Administrative Expenses (g)	$45,000 +$8,000	$30,000 + $8,000	$25,000 + $8,000	$124,000
Total Fixed Costs (h=f+g)	$119,400	$104,400	$101,900	$325,700
Income (Loss) from Operations (e-h)	$ (39,400)	$ 125,600	$135,600	$221,800

Working Notes

i) The Fixed Cost of Division II is Divided Equal among all the other divisions:-

a) Cost of Goods Sold = ($192,000*0.10)/3 = $19,200/3 = $6,400

b) Selling and Administrative Expenses = ($60,000*0.4)/3 = $24,000/3 = $8,000

ii) The Fixed Costs of Division III and Division IV is calculated as follows:

Total Costs - Variable Costs

e.g. Division III Costs of Goods Sold = $300,000 - $240,000

= $ 60,000

d) Reconciliation of Operating Income

Net Operating Income after Discontinuing Division II	$221,800
Less: Total Operating Income before	$213,000
Net Increase in Operating Income	$8,800