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Pierre Manufacturing Company has four operating divisions. During the fi rst quarter of 2012, the company

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P26-3A Pierre Manufacturing Company has four operating divisions. During the fi rst quarter
of 2012, the company reported total income from operations of $61,000 and the following results
for the divisions.

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

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 fi xed costs and expenses for that division.
Top management is deeply concerned about the unprofi table 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 unprofi table 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 Pierre Manufacturing
Company, assuming (1) the Denver Division is eliminated, and (2) the unavoidable
fi xed 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

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