Problem: Lewis Manufacturing Company has four operating divisions. During the first quarter of 2005, the company reported aggregate income from operations of $176,000 and following division results.
| Divisions |
|
|
I |
II |
III |
IV |
| Cost |
$250,000 |
$200,000 |
$500,000 |
$400,000 |
| Cost of goods sold |
$200,000 |
$189,000 |
$300,000 |
$250,000 |
| Selling and Administrative expenses |
$65,000 |
$60,000 |
$60,000 |
$50,000 |
| Income (loss) from operations |
-$15,000 |
-$49,000 |
$140,000 |
$100,000 |
Analysis reveals the following percentage of variable cost in each division.
|
I |
II |
III |
IV |
| Cost of goods sold |
70% |
90% |
80% |
75% |
| Selling and administrative expenses |
40 |
70 |
50 |
60 |
Discontinuance of any division would save 50% of the fixed costs and expenses for that division.
Top managment is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be discontinued.
Instructions:
1. Compute the contribution margin for divisions I and II?
2. 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?
3. Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II's unavoidable fixed cost are allocated equally to the continuing divisions.
4. Reconcile the total income from operations ($176,000) with the total income from operations without Division II.