Question

Problem 12-5 Riverbed Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $191,000 and the following divisional res I results. Division II III IV Sales $250,000 $198,000 $496,000 $443,000 Cost of goods sold 205,000 190,000 297,000 255,000 Selling and administrative expenses 70,000 64,000 61,000 54,000 $ (25,000) Income (loss) from operations $ (56,000) $134,000 $138,000 Analysis reveals the following percentages of variable costs in each division. II III IV 89 % 74 % Cost of goods sold 69 % 61 51 58 Selling and administrative expenses 37 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. Your answer is partially correct. Try again. Compute the contribution margin for Divisions I and II. (Enter negative amounts using either a negative sign preceding the number eg.45 or parentheses eg. (45) Division II Division I 2000-2019 John Wiley A Sons. Inc. AI Rights Reserved. A Division of Jehn Wiey A Sons, Inc. Ucense Agreementi Privacy Policy

Answer 1

Answer -

1. Answer -

Contribution margin for Divisions I and II:

	Division I	Division II
Sales	$250000	$198000
Variable costs:
Cost of goods sold	$141450	$169100
Selling and administrative	$25900	$39040
Total variable costs	$167350	$208140
Contribution margin	$82650	($10140)

Calculation:

Here,

Division I:

Cost of goods sold = $205000 * 69% = $141450

Selling and administrative = $70000 * 37% = $25900

Division II:

Cost of goods sold = $190000 * 89% = $169100

Selling and administrative = $64000 * 61% = $39040

Now,

Contribution margin = Sales - Total variable costs

Division I = $250000 - $167350 = $82650

Division II = $198000 - $208140 = ($10140)

2. Answer -

An incremental analysis concerning the possible discontinuance of Division I:

	Continue	Eliminate	Net Income Increase (Decrease)
Contribution margin	$82650	$0	($82650)
Fixed Costs:
Cost of goods sold	$63550	$31775	$31775
Selling and administrative	$44100	$22050	$22050
Total fixed expenses	$107650	$53825	$53825
Income (loss) from operations	($25000)	($53825)	($28825)

Calculation:

Here,

Continue:

Cost of goods sold = $205000 * (100 - 69)% = $63550

Selling and administrative = $70000 * (100 - 37)% = $44100

As per given information,

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Eliminate:

Cost of goods sold = $63550 * 50% = $31775

Selling and administrative = $44100 * 50% = $22050

3. Answer -

An incremental analysis concerning the possible discontinuance of Division II:

	Continue	Eliminate	Net Income Increase (Decrease)
Contribution margin	($10750)	$0	$10750
Fixed Costs:
Cost of goods sold	$20900	$10450	$10450
Selling and administrative	$24960	$12480	$12480
Total fixed expenses	$45860	$22930	$22930
Income (loss) from operations	($56610)	($22930)	$33680

Calculation:

Here,

Continue:

Cost of goods sold = $190000 * (100 - 89)% = $20900

Selling and administrative = $64000 * (100 - 61)% = $24960

As per given information,

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Eliminate:

Cost of goods sold = $20900 * 50% = $10450

Selling and administrative = $24960 * 50% = $12480

4. Answer -

Columnar Condensed Income Statement for Riverbed Company

Riverbed Company
CVP Income Statement
For the Quarter Ended March 31, 2017
	Divisions
	I	III	IV	Total
Sales	$250000	$496000	$443000	$1189000
Variable costs:
Cost of goods sold	$141450	$237600	$188700	$567750
Selling and administrative	$25900	$31110	$31320	$88330
Total variable costs	$167350	$268710	$220020	$656080
Contribution margin	$82650	$227290	$222980	$532920
Fixed costs:
Cost of goods sold	$67033.33	$62883.33	$69783.33	$199700
Selling and administrative	$48260	$34050	$26840	$109150
Total fixed costs	$115293.33	$96933.33	$96623.33	$308850
Income (loss) from operation	($32643.33)	$130356.67	$126356.67	$224070

Calculation:

Division I:

Variable costs:

Cost of goods sold = $205000 * 69% = $141450

Selling and administrative = $70000 * 37% = $25900

Fixed costs:

Cost of goods sold = $205000 * (100 - 69)% = $63550

Selling and administrative = $70000 * (100 - 37)% = $44100

But,

Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.

Here,

As per given information,

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

That means remaining 50% of fixed costs are unavoidable costs.

So,

Fixed costs:

Cost of goods sold = $63550 + ($10450 / 3) = $67033.33

Selling and administrative = $44100 + ($12480 / 3) = $48260

Division III:

Variable costs:

Cost of goods sold = $297000 * 80% = $237600

Selling and administrative = $61000 * 51% = $31110

Fixed costs:

Cost of goods sold = $297000 * (100 - 80)% = $59400

Selling and administrative = $61000 * (100 - 51)% = $29890

But,

Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.

Here,

As per given information,

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

That means remaining 50% of fixed costs are unavoidable costs.

So,

Fixed costs:

Cost of goods sold = $59400 + ($10450 / 3) = $62883.33

Selling and administrative = $29890 + ($12480 / 3) = $34050

Division IV:

Variable costs:

Cost of goods sold = $255000 * 74% = $188700

Selling and administrative = $54000 * 58% = $31320

Fixed costs:

Cost of goods sold = $255000 * (100 - 74)% = $66300

Selling and administrative = $54000 * (100 - 58)% = $22680

But,

Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.

Here,

As per given information,

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

That means remaining 50% of fixed costs are unavoidable costs.

So,

Fixed costs:

Cost of goods sold = $66300 + ($10450 / 3) = $69783.33

Selling and administrative = $22680 + ($12480 / 3) = $26840