Problem 20-5A

Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $200,700 and the following divisional results.

		Division
		I			II			III		IV
Sales		$249,600			$199,600			$501,100		$450,100
Cost of goods sold		204,300			193,500			304,500		250,100
Selling and administrative expenses		69,300			59,800			64,000		54,200
Income (loss) from operations		$ (24,000)			$ (53,700)			$132,600		$145,800

Analysis reveals the following percentages of variable costs in each division.

		I		II		III		IV
Cost of goods sold		76%		90%		82%		76%
Selling and administrative expenses		39%		71%		47%		57%

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.

Compute the contribution margin for Divisions I and II. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Division I		Division II
Contribution margin		$		$

Prepare an incremental analysis concerning the possible discontinuance of Division I. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Prepare an incremental analysis concerning the possible discontinuance of Division II. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

What course of action do you recommend for each division?

Division I		EliminatedContinued
Division II		EliminatedContinued

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Prepare a columnar condensed income statement for Gutierrez Company, assuming Division II is eliminated. Division IIs unavoidable fixed costs are allocated equally to the continuing divisions. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answers to 0 decimal places, e.g. 125.)