Question

Culver Company has four operating divisions. During the first quarter of 2017, the company reported aggregate income from operations of $205,100 and the following divisional results. Division I II III IV Sales $250,000 $198,000 $499,000 $446,000 Cost of goods sold 198,000 191,000 298,000 254,000 Selling and administrative expenses 74,900 63,000 63,000 46,000 Income (loss) from operations $ (22,900) $ (56,000) $138,000 $146,000 Analysis reveals the following percentages of variable costs in each division. I II III IV Cost of goods sold 69 % 90 % 80 % 74 % Selling and administrative expenses 41 62 52 58 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.

Answer 1

Income after discontinuing operations from both departments 1 and 2 is greateri.e. $ 207 444 than income after discontinuing operations from department 1 . i.e. $ 172964

Step-by-step explanation:

Option 1:

If the 1st division is discontinued. 50 % of the fixed costs and expenses will continue and included in irrelevant costs.

Culver Company

Income Statement

For the 1st Quarter 2017

Division II III IV Irrelevant Costs

Sales $198,000 $499,000 $446,000

Cost of G. Sold 191,000 298,000 254,000

V. COGS 90 % 80 % 74 %

V.COGS 171,900 238,400 187960

FIxed COGs 19,100 59600 66,040 30690

Selling &

Administrative Exps 63,000 63,000 46,000

Var. S& Admin Exps. 62% 52% 58%

Var. S& Admin Exps. 39060 32760 26,680

Fixed S.& Admin Exps 23940 30240 19320 24346

Income (loss) $ (56,000) $138,000 $146,000

Total Income = $ (56,000)+$138,000+$146,000-30690- 24346

Total Income= $ 172964

Option 2:

If both the 1st and 2nd division are discontinued. 50 % of the fixed costs and expenses are added under the section II.

Culver Company

Income Statement

For the 1st Quarter 2017

Division II III IV Irrelevant Costs

Sales $499,000 $446,000

Cost of G. Sold 298,000 254,000

V. COGS 80 % 74 %

V.COGS 238,400 187960

FIxed COGs 9,550 59600 66,040 30690

Selling &

Administrative Exps 63,000 46,000

Var. S& Admin Exps. 52% 58%

Var. S& Admin Exps. 32760 26,680

Fixed S.& Admin Exps 11970 30240 19320 24346

Income (loss) $138,000 $146,000

Total Income = $138,000+$146,000-30690- 24346- 9,550 - 11970

Total Income= $ 207 444

We calculate the fixed and variable costs by multiplying with the given percentages and subtracting it from the total .

Culver Company

Income Statement

For the 1st Quarter 2017

Division I II III IV

Sales $250,000 $198,000 $499,000 $446,000

Cost of G. Sold 198,000 191,000 298,000 254,000

V. COGS 69 % 90 % 80 % 74 %

V.COGS 136,620 171,900 238,400 187960

FIxed COGs 61,380 19,100 59600 66,040

Selling &

Administrative Exps 74,900 63,000 63,000 46,000

Var. S& Admin Exps. 41% 62% 52% 58%

Var. S& Admin Exps. 30,709 39060 32760 26,680

Fixed S.& Admin Exps 48691 23940 30240 19320

Income (loss) $ (22,900) $ (56,000) $138,000 $146,000