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Deskins Manufacturing Company has four operating divisions During the first quarter of 2010 the company reported total income from operations of $61000 and the following results for the divisions

Deskins Manufacturing Company has four operating divisions. During the first quarter of 2010 the company reported total income from operations of $61,000 and the following results for the divisions.

   

Division

   
 

Denver

Miami

San Diego

Tacoma

Sales

$455,000

$730,000

$920,000

$515,000

Cost of goods sold

380,000

480,000

576,000

430,000

Selling and administrative expenses

120,000

207,000

246,000

120,000

Income (loss) from operations

$ (45,000)

$ 43,000

$ 98,000

$ (35,000)

       

(SO

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

 

Denver

Miami

San Diego

Tacoma

Cost of goods sold

95%

80%

90%

90%

Selling and administrative expenses

80

60

70

60

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 (Denver and

Tacoma).The consensus is that one or both of the divisions should be eliminated.

Instructions

(a) Compute the contribution margin for the two unprofitable divisions.

(b) Prepare an incremental analysis concerning the possible elimination of (1) the Denver Division and (2) the Tacoma Division. What course of action do you recommend for each division?

(c) Prepare a columnar condensed income statement using the CVP format for Deskins Manufacturing Company, assuming (1) the Denver Division is eliminated, and (2) the unavoidable fixed costs and expenses of the Denver Division are allocated 30% to Miami, 50% to San Diego, and 20% to Tacoma.

(d) Compare the total income from operations with the Denver Division ($61,000) to total income from operations without this division.

Jun 23 2020 View more View Less

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