Laos Manufacturing Company has four operating divisions. During the first quarter of 2022, the company reported total income from operations of $36,000 and the following results for the divisions:

Closing any division would save 70% of the fixed costs and expenses for that division. Top management is deeply concerned about the unprofitable divisions (Kelowna and Moncton). 

The consensus is that one or both of them should be eliminated.

Instructions 

a. Calculate the contribution margin for the two unprofitable divisions. 

b. Prepare an incremental analysis for the possible elimination of 

(1) The Kelowna division 

(2) The Moncton division. 

What course of action do you recommend for each division? 

c. Prepare a condensed income statement in columns using the CVP format for Laos Manufacturing Company, assuming 

(1) The Kelowna division is eliminated,

(2) The unavoidable fixed costs and expenses of the Kelowna division are allocated 30% to Brandon, 50% to Sherbrooke, and 20% to Moncton.

d. Compare the total income from operations with the Kelowna division ($36,000) versus total income from operations without this division. 

Transcribed Image Text:

Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations Kelowna $405,000 400,000 100,000 $ (95,000) Cost of goods sold Selling and administrative expenses Division Kelowna 90% 60 Brandon Sherbrooke $730,000 480,000 207,000 $ 43,000 An analysis reveals the following percentages of variable costs in each division. $920,000 576,000 246,000 $ 98,000 Brandon 80% 60 Sherbrooke 90% 70 Moncton $500,000 390,000 120,000 $(10,000) Moncton 95% 80