Week 5 P9-5A Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results.

P9-5A Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results. 

	Division
	One	Two	Three	Four
Sales	$250,000	$200,000	$500,000	$400,000
COGS	200,000	189,000	300,000	250,000
S & A Expense	65,000	60,000	60,000	50,000
Income (loss)	-$15,000	-$49,000	$140,000	$100,000

 

 

	Division
	One	Two	Three	Four
COGS	70%	90%	80%	75%
S&A Exp.	40%	70%	50%	60%

 

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 (one and two). Consensus is that one or both of the division should be discontinued.

 

Instructions
a. Computer 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 Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II's unavoidable fixed cost are allocated equally to the continuing divisions

d. Reconcile the total income from operations ($176,000) with the total income from operations without Division II.

 

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