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P7-5A – Prepare incremental analysis concerning elimination of divisions.
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse
Problem P7-5A Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported
aggregate income from operations of
$213 0
and the following divisional results.
00
Division
I II III IV
Sales $250 000
$200 000
$500 000
$450 000
Cost of goods sold
200 000
192 000
300 000
250 000
Selling and administrative expenses
75 000
60 000
60 000
50 000
Income (loss) from operations
($25 0
($52 0
$140 0
$150 000
00)
00)
00
Analysis reveals the following percentages of variable costs in each division.
I II III IV
Cost of goods sold
75%
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 management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be continued.
Instructions:
(a) Compute the contribution margin for Divisions I and II.
Division I
Division II
Sales Amount
Amount
Variable costs
Cost of goods sold
Formula
Amount
Selling and administrative
Formula
Amount
Total variable expenses
Formula
Formula
Contribution margin
Formula
Formula
(b)(1) Prepare an incremental analysis concerning the possible discontinuance of Division I.
Division I Continue
Eliminate
Net Income Increase (Decre
Contribution margin (above)
Formula
Fixed costs
ase)
Cost of goods sold
Formula
Formula
Formula
Selling and administrative
Formula
Formula
Formula
Total fixed expenses
Formula
Formula
Formula
Income (loss) from operations
Formula
Formula
Formula
(b)(2) Prepare an incremental analysis concerning the possible
discontinuance of Division II.
Division II Continue
Eliminate
Net Income Increase (Decrease)
Contribution margin (above)
Formula
Fixed costs
Title Formula
Formula
Formula
Title Formula
Formula
Formula
Title Formula
Formula
Formula
Title Formula
Formula
Formula
(b)(3) What course of action do you recommend for each division?
Enter text answer here.
Enter text answer here.
(c) Prepare a columnar condensed income statement for Moreno Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II's unavoidable fixed costs are allocated equally to the continuing divisions.
GUTIERREZ MANUFACTURING COMPANY
CVP Income Statement
For the Quarter Ended March 31, 2014
Divisions
I III IV
Total
Sales Amount
Amount
Amount
Formula
Variable costs
Title Formula
Formula
Formula
Formula
Title Formula
Formula
Formula
Formula
Title Formula
Formula
Formula
Formula
Contribution margin
Formula
Formula
Formula
Formula
Fixed costs
Title Formula
Formula
Formula
Formula
Title Formula
Formula
Formula
Formula
Title Formula
Formula
Formula
Formula
Income (loss) from operations
Formula
Formula
Formula
Formula
Enter text answer here.
Enter text answer here.
(d) Reconcile the total income from operations,
$213 000
with the total income from operations without Division II.
Enter text answer here.
