Question

Case 3 A Saudi Manufacturing Company has four operating divisions. During the first quarter of 2019, the company reported total income from operations of SR61,000 and the following results for the divisions. Division Jeddah Madenah Taif Makkah Sales SR455,000 SR730,000 SR920,000 SR515,000 Cost of goods sold 380,000 480,000 576,000 430,000 Selling and administrative 120,000 207,000 246,000 120,000 expenses Income (loss) from operations SR(45,000)| SR43,000 | SR98,000 | SR(35,000) 70 60 Analysis reveals the following percentages of variable costs in each division. Jeddah Madenah Taif Makkah Cost of goods sold 95% 80% 90% 90% Selling and administrative 80 60 expenses 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 (Jeddah and Makkah). The consensus is that one or both of the divisions should be eliminated. Required a) Prepare a CVP income statement for the both Jeddah and Makkah divisions (1 mark) b) Which division should be eliminated (1 mark)?

Answer 1

	Jeddah	Makkah
Sales Revenue	455000	515000
Less Variable Costs
Cost of Goods sold	361000	387000
Selling and administrative expenses	96000	72000
Total Variable Costs	457000	459000
Contribution Margin	-2000	56000
Less Fixed Costs
Cost of Goods sold	19000	43000
Selling and administrative expenses	24000	48000
Total Fixed Costs	43000	91000
Income (loss)	-45000	-35000

Jeddah Division should be eliminated as it gives negative contribution margin