Question
Duwasinda Company has two operating divisions --Indigenous and Native. The January 2021 income statements for each division and the company as a whole are as
Duwasinda Company has two operating divisions --Indigenous and Native. The January 2021 income statements for each division and the company as a whole are as follows:
Indigenous Division Native Division Total Sales P2,812,500 P 1,500,000 P4,312,500 Cost of goods sold: Prime cost P 500,000 P 375,000 P 875,000 Variable factory overhead 375,000 300,000 675,000 Fixed factory overhead 562,500 450,000 1,012,500 Total P1,437,500 P 1,125,000 P2,562,500 Gross profit P1.375,000 P 375,000 P1,750,000 Other expenses: Sales commissions P 250,000 P 125,000 P 375,000 Packing and shipping 225,000 175,000 400,000 Advertising 300,000 200,000 500,000 Administrative 400,000 200,000 600,000 Total P1,175,000 P 700,000 P1,875,000 Operating income (loss) P 200,000 P (325,000) P(125,000) Company creditors recently informed management that the company must attain more profitable operations before further credit will be extended. One possible move that would aid this situation would be to sell the Native Division. One prospective buyer would buy this division for P5,000,000; the money from the sale could be invested at 8% interest. One effect of the sale of the Native Division would be that all of its variable manufacturing costs could be eliminated; however, none of the fixed factory overhead expenses would be avoided. The sales commissions and packing and shipping expenses are completely variable. The advertising expenses for the company as a whole would be P375,000 after the elimination of the Native Division. Finally, half of the administrative expenses charged to the Native Division would be eliminated if the division were sold. Required: (1) Prepare a revised income statement for the company as a whole for the month of January if the Native Division is eliminated to improve the credit rating. (2) Should the Native Division be eliminated to improve profits? Explain your answer.
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