Panda Corporation has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional results shown below.
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IV |
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Sales revenue |
$250,000 |
$200,000 |
$500,000 |
$450,000 |
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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 |
$ (25,000) |
$ (52,000) |
$140,000 |
$150,000 |
Analysis reveals the following percentages of variable costs in each division.
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I |
II |
III |
IV |
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Cost of goods sold |
75% |
90% |
80% |
75% |
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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 (III and IV). Consensus is that one or both of the divisions should be discontinued.
Instructions
(a)Compute the contribution margin for Divisions III and IV.
(b)Prepare an incremental analysis concerning the possible discontinuance of (1) Division III and (2) Division IV. What course of action do you recommend for each division?
(c)Prepare a columnar condensed income statement for Panda Corporation, assuming Division IV is eliminated. (Use the CVP format.) Division IV”s unavoidable fixed costs are allocated equally to the continuing divisions.
(d)Reconcile the total income from operations ($129,000) with the total income from operations without Division IV.
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