Problem: Deskins Manufacturing Company has four operating divisions. During the first quarter of 2010 the company reported total income from operations of $61,000 and the following results for the divisions.
Analysis reveals the following percentages of variable costs in each division.
Division: Denver Miami San Diego Tacoma
Sales $455,000 $730,000 $920,000 $515,000
Cost of goods sold 380,000 480,000 576,000 430,000
Selling and administrative expenses 120,000 207,000 246,000 120,000
Income (loss) from operations $(45,000) $ 43,000 $ 98,000 $(35,000)
Denver Miami San Diego Tacoma
Cost of goods sold 95% 80% 90% 90%
Selling and administrative expenses 80 60 70 60
Discontinuance of any division would save 60% of the fixed costs and expenses for that division.
Top management is deeply concerned about the unprofitable divisions (Denver and Tacoma).The consensus is that one or both of the divisions should be eliminated.
Instructions:
(a) Compute the contribution margin for the two unprofitable divisions.
(b) Prepare an incremental analysis concerning the possible elimination of (1) the Denver Division and (2) the Tacoma Division. What course of action do you recommend for each division?
(c) Prepare a columnar condensed income statement using the CVP format for Deskins Manufacturing Company, assuming (1) the Denver Division is eliminated, and (2) the unavoidable fixed costs and expenses of the Denver Division are allocated 30% to Miami, 50% to San Diego, and 20% to Tacoma.
(d) Compare the total income from operations with the Denver Division ($61,000) to total income from operations without this division.