Problem - "Tryon Manufacturing Company has four operating divisions. During the first quarterof 2009, the company reported aggregate income from operations of $135,000 and the divisional results shown below:
Division
I II III IV
Sales $510,000 $390,000 $310,000 $170,000
COGS 300,000 250,000 270,000 150,000
Selling/AdminExp 60,000 80,000 65,000 70,000
Income (loss)from Op$150,000 $ 60,000 $ (25,000) $(50,000)
Analysis reveals the following percentages of variable costs in each division.
I II III IV
COGS 70% 80% 75% 90%
Selling/Admin Exp 40 50 60 70
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 Tryon Manufacturing, 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 ($135,000) with the total income from operations without Division IV."