Wayne Manufacturing Company has four operating divisions. During the first quarter of 2016, the company reported the divisional results shown below and aggregate income shown below.

Division:

North

South

East

West

Aggregate Income

Sales

$ 459,000

$ 351,000

$ 279,000

$ 162,000

Cost of goods sold

270,000

225,000

243,000

135,000

Selling and administrative expenses

54,000

72,000

58,500

63,000

Income (loss) from operations

$ 135,000

$ 54,000

$ (22,500)

$ (36,000)

$ 130,500

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

Division:

North

South

East

West

Cost of goods sold

70%

80%

75%

90%

Selling and administrative expenses

40%

50%

65%

70%

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 (East and West). Consensus is that one or both of the divisions should be discontinued.

Instructions - Your solutions should be clearly labeled on Solutions of this workbook.

(a) Compute the contribution margin for the East and West Divisions. (See illustration 20-17 for guidance, if needed.)

(b) Prepare an incremental analysis concerning the possible discontinuance of (1) East Division and (2) West Division. What course of action do you recommend for each division? Should either be closed? (See illustration 20-18 for guidance, if needed.)

(c) Prepare a columnar condensed income statement for Wayne Manufacturing, assuming the division(s) that should be eliminated are eliminated. Use the CVP format. Remember: Closed division's unavoidable fixed costs are allocated equally to the continuing divisions. (See Illustrations 20-16 and 20-17 for guidance, if needed.)