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Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results.
Division
I II III IV
Sales $250,000 $200,000 $500,000 $400,000
Cost of goods sold 200,000 189,000 300,000 250,000
Selling 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 percentages of variable costs 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 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) Compute the contribution margin for Divisions I and II.
(a) I $84,000
(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 Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.
(c) Income III $133,850
(d) Reconcile the total income from operations ($176,000) with the total income from operations without Division II.
