P26 - 3B

Yacco Manufacturing Company has four operating divisions. During the fi rst quarter of 2013, the company reported aggregate income from operations of $135,000 and the divisional results shown on the next page.

Division I II III IV Sales $510,000 $390,000 $310,000 $170,000 Cost of goods sold 300,000 250,000 270,000 150,000 Selling and administrative expenses 60,000 80,000 65,000 70,000 Income (loss) from operations $150,000 $ 60,000 $(25,000) $(50,000)

Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 70% 80% 75% 90% Selling and administrative expenses 40 50 60 70

Discontinuance of any division would save 50% of the fi xed costs and expenses for that division. Top management is very concerned about the unprofi table 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 Yacco Manufacturing, assuming Division IV is eliminated. Use the CVP format. Division IVs unavoidable fi xed costs are allocated equally to the continuing divisions. (d) Reconcile the total income from operations ($135,000) with the total income from operations without Division IV.