Question

Prepare incremental analysis concerning elimination of divisions P7.5A (LO 6), AN Brislin Company has four operating divisions. During the first quarter of 2020 the company reported aggregate income from operations of $213,000 and the following divisional results Excel Division IV п ш I $200,000 192,000 60,000 $450,000 250,000 50,000 $250,000 200,000 75,000 $500,000 300,000 Sales Cost of goods sold Selling and administrative expenses 60,000 $(52,000) $140,000 $150,000 Income (loss) from operations $(25,000) Analysis reveals the following percentages of variable costs in each division. IV I П ш 75% 70% 90% 80% Cost of goods sold Selling and administrative expenses 60 60 40 50 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. Instructions a. Contribution margin I $80,000 a. Compute the contribution margin for Divisions I and II. b. Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division? c. Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated. (Use the CVP format.) Division IIl's unavoidable fixed costs are allocated equally to the continuing divisions c. Income III $132,800 d. Reconcile the total income from operations ($213,000) with the total income from operations with- out Division II.

Answer 1

Answer :

(a.)

Particulars	First Division	Second Division
Sales	250,000	200,000
Less :
Variable cost of goods sold	(140,000)	(172,800)
($200,000*0.7, $192,000*0.9)
Variable selling and admin cost	(30,000)	(36,000)
($75,000*0.4, $60,000*0.6)
Contribution margin	80,000	(8,800)

(b.)

Particulars	Continue ($)	Eliminate ($)	Net income Increase/ Decrease ($)
Contribution margin (A)	80,000	-	(80,000)
Cost of goods sold [$200,000*0.30] [$60,000*0.50]	60,000	30,000	30,000
Selling and administrative [$75,000*0.60] [$45,000*.050]	45,000	22,500	22,500
Total fixed expenses (B)	105,000	52,500	52,500
Income (Loss) from operations (A-B)	(25,000)	(52,500)	(27,500)

(c.)

Particulars	Continue ($)	Eliminate ($)	Net income Increase / Decrease ($)
Contribution margin (A)	(8,800)	-	8,800
Fixed costs :
Cost of goods sold [192,000*0.10] [$19,200*0.50]	19,200	9,600	9,600
Selling and administrative [$60,000*0.60] [$24,000*0.50]	24,000	12,000	12,000
Total fixed expenses (B)	43,200	21,600	21,600
Income (Loss) from operation (A-B)	(52,000)	(21,600	30,400

Elimination of Division :

Contribution margin for second division is negative and income from operation increases by $30,400 when it discounted. Thus, first division should be eliminated.

Contribution margin for first division is positive and income from operation decreases by -$27,500 when it discounted. Thus, second division should be continued.

(d.)

Particulars	First division ($)	Third division ($)	Fourth division ($)	Total ($)
Sales (A)	250,000	500,000	450,000	1,200,000
Less: Variable costs
Cost of goods sold [$20,000*0.7] [$30,000*0.8] [$250,000*0.75]	140,000	240,000	187,500	567,500
Selling and administrative cost [$75,000*0.4] [$60,000*0.5] [$50,000*0.60]	30,000	30,000	30,000	90,000
Total variable costs (B)	170,000	270,000	217,500	657,500
Contribution margin (A-B)	80,000	230,000	232,500	542,500
Less Fixed costs
Cost of goods sold [$200,000*0.3 + ($192,000*0.1*0.5)/3)] [$300,000*0.2 + ($192,000*0.1*0.5)/3)] [$250,000*0.25 + ($192,000*0.1*0.5)/3)]	63,200	63,200	63,200	189,600
Selling and administrative cost [$75,000*0.6 + ($60,000*0.4*0.5)/3)] [$60,000*0.5 + ($60,000*0.4*0.5)/3)] [$50,000*0.4 + ($60,000*0.4*0.5)/3)]	49,000	34,000	24,000	107,000
Total Fixed cost (C)	112,200	97,200	87,200	296,600
Income (Loss) from operation	(32,200)	132,800	142,800	243,400