P7-5A Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $213,000 and the following divisional results.

 

                             Division                            

 

 

 

Â	I	II	III	Â	IV
Sales	$250,000	$200,000	$500,000	Â	$450,000
Cost of goods sold	200,000	192,000	300,000	Â	250,000
Selling and administrative expenses	75,000	60,000	60,000	Â	50,000
Income (loss) from operations	$ (25,000)	$ (52,000)	$140,000	Â	$150,000

 

 

 

                                                                         

 

 

 

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

 

 

 

  Cost of goods sold	   I 75%	  II 90%	 III 80%	 IV 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).    Con-

 

sensus is that one or both of the divisions should be  discontinued.

 

 

 

Instructions

 

(a)  Compute the contribution margin for Divisions I and II.

 

(b)  Prepare an incremental analysis concerning the possible discontinuance of (1) Divi- sion I and (2) Division II. What course of action do you recommend for each division?

 

(c)   Prepare a columnar condensed income statement for Gutierrez Company, assuming Division II is eliminated. (Use the CVP format.) Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.

 

(d)  Reconcile the total income from operations ($213,000) with the total income from operations without Division II.

 

 

 

 

 

 

 

 

 

 

 

Pq55q555ROBLEMS: SET B