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P7-5B Panda Corporation

Price: $2.50


Panda Corporation has four operating divisions. During the first quarter of 2014,
the company reported aggregate income from operations of $129,000 and the divisional
results shown below.

  I  II   III  IV
Sales   510,000  400,000  310,000  170,000
Cost of goods sold   300,000  250,000  270,000  156,000
Selling and administrative expenses   60,000  80,000  75,000  70,000
Income (loss) from operations   150,000  70,000  (35,000)  (56,000)

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 (III and IV). Consensus
is that one or both of the divisions should be discontinued.

Instructions
(a) Compute the contribution margin for Divisions III and IV.
(b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division
III and (2) Division IV. What course of action do you recommend for each
division?
(c) Prepare a columnar condensed income statement for Panda Corporation, assuming
Division IV is eliminated. (Use the CVP format.) Division IV’s unavoidable fixed costs
are allocated equally to the continuing divisions.
(d) Reconcile the total income from operations ($129,000) with the total income from
operations without Division IV.

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