Simpson Manufacturing Company has four operating divisions. During the first quarter of 2002, the company reported aggregate income from operations of \($120,000\) and the following divisional results.

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

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 (III and IV). Consensus is that one or both of the divisions should be discontinued.

Instructions

(a) Compute the contribution margin for Divisions III and IV.

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

(c) Prepare a columnar condensed income statement for Simpson Manufacturing, as- suming Division III is eliminated. Use the CVP format. Division Ill's unavoidable fixed costs are allocated equally to the continuing divisions.

(d) Reconcile the total income from operations ($120,000) with the total income from operations without Division IV.

Transcribed Image Text:

Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations Division II III IV $490,000 $410,000 $200,000 $300,000 300,000 250,000 195,000 280,000 60,000 80,000 65,000 50,000 $130,000 80,000 $ (60,000) $(30,000)