Question
NHL Manufacturing Company has four operating divisions. During the first quarter of 2020, the company reported total income from operations of $36,000 and the following
NHL Manufacturing Company has four operating divisions. During the first quarter of 2020, the company reported total income from operations of $36,000 and the following results for the divisions:
Division | ||||||||
Leafs | Jets | Habs | Oilers | |||||
Sales | $ 405,000 | $730,000 | $920,000 | $500,000 | ||||
Cost of goods sold | 400,000 | 480,000 | 576,000 | 390,000 | ||||
Selling and administrative expenses | 100,000 | 207,000 | 246,000 | 120,000 | ||||
Income (loss) from operations | $(95,000) | $ 43,000 | $ 98,000 | $(10,000) |
An analysis reveals the following percentages of variable costs in each division.
Leafs | Jets | Habs | Oilers | |||||
Cost of goods sold | 90% | 80% | 90% | 95% | ||||
Selling and administrative expenses | 60 | 60 | 70 | 80 |
Closing any division would save 70% of the fixed costs and expenses for that division.
Top management is deeply concerned about the unprofitable divisions (Leafs and Oilers). The consensus is that one or both of them should be eliminated.
Instructions
- Calculate the contribution margin for the two unprofitable divisions.
- Prepare an incremental analysis for the possible elimination of (1) the Leafs division and (2) the Oilers division. What course of action do you recommend for each division?
- Prepare a condensed income statement in columns using the CVP format for NHL Manufacturing Company, assuming (1) the Leafs division is eliminated, and (2) the unavoidable fixed costs and expenses of the Leafs division are allocated 30% to Jets, 50% to Habs, and 20% to Oilers.
d. Compare the total income from operations with the Leafs division ($36,000) versus total income from operations without this division.
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