P7-5B 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.

 

 

 

Division

 

I                 II                III                IV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales	$510,000	Â	$400,000	Â	$310,000	$170,000	Â
Cost of goods sold	300,000	Â	250,000	Â	270,000	156,000	Â
Selling and administrative expenses	60,000	Â	80,000	Â	75,000	70,000	Â
Income (loss) from operations	$150,000	Â	$  70,000	Â	$ (35,000)	$ (56,000)	Â

 

 

 

                                                                    

 

 

 

Analysis reveals the following percentages of variable costs in each division.

 

 

 

Â	I	Â	II	Â	III	Â	IV
Cost of goods sold	70%	Â	80%	Â	70%	Â	90%
Selling and administrative expenses	40	Â	50	Â	60	Â	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). Con- sensus 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) Divi- sion 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROBLEMS: SET C

 

 

 

 

WATERWAYS CONTINUING PROBLEM