P20-5A Prepare incremental analysis concerning elimination of divisions. Brislin Company has four operating divisions. During the first quarter of 2020, the company reported aggregate income from operations of $213,000 and the following divisional results. Division IV Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations $250,000 200,000 75,000 ($25,000) $200,000 192,000 60,000 ($52,000) $500,000 300,000 60,000 $140,000 $450,000 250,000 50,000 $150,000 Analysis reveals the following percentages of variable costs in each division. 90% 75% Cost of good sold Selling and administrative expenses 70% 40 80% 50 60 60 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 (I and II). Consensus is that one or both of the divisions should be discontinued. (a) Instructions Compute the contribution margin for Division I and II. (b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division? (c) Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated. (Use the CVP format.) Division Il's unavoidable fixed costs are allocated equally to the continuing divisions. Reconcile the total income from operations ($213,000) with the total income from operations without Division II. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". (d) (a) Compute the contribution margin for Division I and II. Division 1 Value Division 11 Value Sales Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin Value Value Value Value 2 ? (b) (1) Prepare an incremental analysis concerning the possible discontinuance of Division 1 Net Income Increase (Decrease) Value Continue Value Eliminate Value Division Contribution margin (Part a) Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations Value Value ? ? Value Value ? ? Value Value ? ? (b) (2) Prepare an incremental analysis concerning the possible discontinuance of Division II. Net Income Increase (Decrease) Value Continue Value Eliminate Value Division 11 Contribution margin (Parta) Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations Value Value ? Value Value Value Value ? ? ? ? ? What course of action do you recommend for each division? Response: (C) Prepare a columnar condensed income statement for Brislin Company, assuming Division II is eliminated. (Use the CVP format.) Division Il's unavoidable fixed costs are allocated equally to the continuing divisions. BRISLIN COMPANY CVP Income Statement For the Quarter Ended March 31, 2020 Divisions I III IV Value Value Value Total ? Value Value ? Value Value ? Value Value Sales Variable costs Cost of goods sold Selling and administrative Total variable costs Contribution margin Fixed costs Cost of goods sold Selling and administrative Total fixed costs Income (loss) from operations Value Value 2 Value Value Value Value (d) Reconcile the total income from operations ($213,000) with the total income from operations without Division II. Response: After you have completed P20-5A, consider the following additional question. Assume that Division Il's cost of goods sold and selling and administrative expenses changed to $180,000 and $75,000 respectively. How do these changes impact the decision to drop or not drop Division II? 1
