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

Answer:

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

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