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P7-5A Gutierrez Company has four operating divisions

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Gutierrez Company has four operating divisions. During the first quarter of 2014,
the company reported aggregate income from operations of $213,000 and the following
divisional results.

  I  II   III  IV
Sales   250,000  200,000  500,000  450,000
Cost of goods sold   200,000  192,000  300,000  250,000
Selling and administrative expenses   75,000  60,000  60,000  50,000
Income (loss) from operations   (25,000)  (52,000)  140,000  150,000

(a) Compute the contribution margin for Divisions I and II.

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

(c) Prepare a columnar condensed income statement for Gutierrez Company, assuming
Division II is eliminated. (Use the CVP format.) Division II’s unavoidable fixed costs
are allocated equally to the continuing divisions.

(d) Reconcile the total income from operations ($213,000) with the total income from
operations without Division II.

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