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Deskins Manufacturing Company: Drop a Segment Division.

Deskins Manufacturing Company has four operating divisions. During the first quarter
of 2010 the company reported total income from operations of $61,000 and the following
results for the divisions.

Analysis reveals the following percentages of variable costs in each division.
Division: Denver Miami San Diego Tacoma
Sales $455,000 $730,000 $920,000 $515,000

Cost of goods sold 380,000 480,000 576,000 430,000
Selling and administrative expenses 120,000 207,000 246,000 120,000
Income (loss) from operations $(45,000) $ 43,000 $ 98,000 $(35,000)

Denver Miami San Diego Tacoma
Cost of goods sold 95% 80% 90% 90%
Selling and administrative expenses 80 60 70 60

Discontinuance of any division would save 60% of the fixed costs and expenses for that division.
Top management is deeply concerned about the unprofitable divisions (Denver and
Tacoma).The consensus is that one or both of the divisions should be eliminated.

Instructions

(a) Compute the contribution margin for the two unprofitable divisions.

(b) Prepare an incremental analysis concerning the possible elimination of (1) the Denver
Division and (2) the Tacoma Division. What course of action do you recommend for each
division?

(c) Prepare a columnar condensed income statement using the CVP format for Deskins
Manufacturing Company, assuming (1) the Denver Division is eliminated, and (2) the unavoidable
fixed costs and expenses of the Denver Division are allocated 30% to Miami, 50%
to San Diego, and 20% to Tacoma.

(d) Compare the total income from operations with the Denver Division ($61,000) to total income
from operations without this division.

Solution Preview

Strategy:
You have to split the COGS and S&A expenses using the percents they give you. Click in cells to see computations of variable and fixed costs.

Then you figure the unavoidable costs for Denver. This uses the 60% avoidable and to discover the unavoidable (40%). Then, the facts tell you to "spread" the unavoidable across the remaining divisions using the percents shown.

(c) Prepare a columnar condensed income statement using the CVP format for Deskins
Manufacturing Company, assuming (1) the Denver Division is eliminated, and ...

Solution Summary

The "strategy" is explained (steps involved) and then I prepared a new schedule for you with formulas in the cells so you can better see what is going on. I have shown Denver's fixed costs on a separate line for easier comprehension. A paragraph for C and D is given.

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