P7-5A – Prepare incremental analysis concerning elimination of divisions. P8-1A – Use cost-plus pricing to determine various amounts

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P7-5A – Prepare incremental analysis
concerning elimination of divisions.
Managerial Accounting, 6​th​
Edition, by
Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting
by Rex A Schildhouse
Problem P7-5A Gutierrez Company has four
operating divisions. During the first quarter of
2014, the company reported
aggregate
income from
operations of
$
2
1
3
0
and the following
divisional results.

2. 0
0
Division
I II III IV
Sales $
2
5
0
0
0
0
$
2
0
0
0
0
0
$
5
0
0
0
0
0
$4
50
00
0
Cost of
goods sold
2
0
0
0
0
0
1
9
2
0
0
0
3
0
0
0
0
0
25
0
00
0
Selling and
administrati
ve
expenses
7
5
0
0
0
6
0
0
0
0
6
0
0
0
0
50
00
0
Income
(loss) from
operations
($
2
5
0
($
5
2
0
$
1
4
0
0
$1
50
00
0

3. 0
0)
0
0)
0
0
Analysis reveals the following percentages of
variable costs in each division.
I II III IV
Cost of
goods sold
7
5
%
9
0
%
8
0
%
75
%
Selling and
administrati
ve
expenses
4
0
%
7
0
%
5
0
%
60
%
Discontinuance
of any division
would save
5
0
%
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
continued.
Instructions:

4. (a) Compute the contribution margin for
Divisions I and II.
Di
vi
si
o
n
I
Di
vis
ion
II
Sales A
m
o
u
nt
A
m
ou
nt
Variable
costs
Cost of
goods
sold
F
or
m
ul
a
A
m
ou
nt
Selling
and
administr
ative
F
or
m
ul
a
A
m
ou
nt

5. Total
variable
expenses
F
or
m
ul
a
Fo
rm
ula
Contributi
on margin
F
or
m
ul
a
Fo
rm
ula
(b)(1) Prepare an incremental analysis
concerning the possible discontinuance of
Division I.
Division I C
o
nt
in
u
e
El
i
m
in
at
e
Ne
t
Inc
o
m
e
Inc
re
as
e
(D
ec
re
Contribution
margin
(above)
F
o
r
m
ul
a
Fix
ed
co
sts

6. as
e)
Cost of
goods
sold
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Selling
and
administr
ative
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Total
fixed
expenses
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Income
(loss)
from
operation
s
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
(b)(2) Prepare an
incremental analysis
concerning the possible

7. discontinuance of Division
II.
Division II C
o
nt
in
u
e
El
i
m
in
at
e
Ne
t
Inc
o
m
e
Inc
re
as
e
(D
ec
re
as
e)
Contribution
margin
(above)
F
o
r
m
ul
a
Fixed costs
Title F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Title F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula

8. Title F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Title F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
(b)(3) What course of action
do you recommend for each
division?
Enter text answer here.
En
ter
tex
t
an
sw
er
her
e.

9. (c) Prepare a columnar condensed income
statement for Moreno Manufacturing, assuming
Division II is eliminated. Use the CVP format.
Division II's unavoidable fixed costs are
allocated equally to the continuing divisions.
GUTIERREZ MANUFACTURING
COMPANY
CVP Income Statement
For the Quarter Ended March 31,
2014
Divisions
I III I
V
To
tal
Sales A
m
o
u
nt
A
m
o
u
nt
A
m
o
u
nt
Fo
rm
ula
Variable
costs

10. Title F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Title F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Title F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Contributio
n margin
F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Fixed costs
Title F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula

11. Title F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Title F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Income
(loss) from
operations
F
or
m
ul
a
F
or
m
ul
a
F
or
m
ul
a
Fo
rm
ula
Enter text answer here.
En
ter
tex
t
an
sw
er
her
e.

12. (d) Reconcile
the total income
from
operations,
$
2
1
3
0
0
0
with the total income
from operations
without Division II.
Enter text answer here.