Question

P20-5A Prepare incremental analysis concerming.elimination of divisions Brislin Company has four operating divisions. During the first quarter of 2020, the company reported aggregate income from operations of $213,000 and the following divisional results. Division II $500,000 300,000 60,000 IV $200,000 Sales $250,000 200,000 75,000 $450,000 250,000 Cost of goods sold Selling and administrative expenses Income (loss) from operations 192,000 60,000 50,000 ($25,000) ($52,000) $140,000 $150,000 Analysis reveals the following percentages of variable costs in each division. II III IV Cost of good sold Selling and administrative expenses 75% 70% 40 90% 60 80% 50 60 Discontinuance of any division would save 50 % of the foxed costs and expenses for that division. Top management is very concerned about the unprofitable divisions (I and I). Consensus is that one or both of the divisions should be discontinued. Instructions Compute the contribution margin for Division I and I. Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division? Prepare a columnar condensed income statement for Brislin Company, assuming Division I is eliminated. (Use the CVP format.) Division Il's unavoidable fixed costs are allocated equally (a) (b) (c) to the continuing divisions. Reconcile the total income from operations ($213,000) with the total income from operations (d) without Division II. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?"

Answer 1

a)

	Division 1	Division 2
Sales	$250000	$200000
(-) variable cost :
Cost of goods sold	$140000 [$200000×70%]	$172800 [$192000×90%]
Selling and administrative	$30000 [$75000 ×40%]	$36000 [$60000×60%]
Total variable cost	$170000	$208800
Contribution margin	$80000	($8800)

b)

1)

Division 1	continue	eliminate	net income increase (decrease)
Contribution margin	$80000	$0	($80000)
(-) fixed cost :
Cost of goods sold	$60000	$30000	$30000
Selling and administrative	$45000	$22500	$22500
Total fixed cost	$105000	$52500	$52500
Net income (loss)	($25000)	($52500)	($27500)

Response : as the net income decreases by $27500, elimination is not required. It is advised to continue.

2)

	Continue	eliminate	net income increase (decrease)
Contribution margin	($8800)	$0	$8800
(-) fixed cost :
Cost of goods sold	$19200	$9600	$9600
Selling and administrative	$24000	$12000	$12000
Total fixed cost	$43200	$21600	$21600
Net income (loss)	($52000)	($21600)	$30400

Response: as the net income increases by $30400, it is advised to eliminate.

c)

	Division 1	Division 3	Division 4	Total
Sales	$250000	$500000	$450000	$1200000
(-) variable cost :
Cost of goods sold	$140000	$240000 [$300000×80%]	$187500 [$250000×75%]	$567500
Selling and administrative	$30000	$30000 [$60000×50%]	$30000 [$50000×60%]	$90000
Total variable cost	$170000	$270000	$217500	$657500
Contribution margin	$80000	$230000	$232500	$542500
(-) fixed cost :
Cost of goods sold	$60000	$60000	$62500	$182500
Selling and administrative	$45000	$30000	$20000	$95000
Fixed cost of division 2	$7200	$7200	$7200	$21600
Total fixed cost	$112200	$97200	$89700	$299100
Net income (loss)	($32200)	$132800	$142800	$243400

Unavoidable fixed cost of division 2 shared equally = $21600/3 = $7200

d)

Reconciliation -

	Amount
Income before elimination	$213000
(+) net income increase by eliminating	$30400
Income after elimination	$243400