Question
Panda Corporation has four operating divisions. During the fi rst quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional
Panda Corporation has four operating divisions. During the fi rst quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional results shown below. Division I II III IV Sales $510,000 $400,000 $310,000 $170,000
Cost of goods sold 300,000 250,000 270,000 156,000 Selling and administrative expenses 60,000 80,000 75,000 70,000 Income (loss) from operations $150,000 $ 70,000 $ (35,000) $(56,000) Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 70% 80% 70% 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?
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