Ribeiro Manufacturing Company has four operating divisions. During the first quarter of 2022, the company reported aggregate income from operations of $145,000 and the following divisional results:

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). The consensus is that the company should discontinue one or both of these divisions.

Instructions 

a. Calculate the contribution margin for divisions III and IV.

b. Prepare an incremental analysis for the possible discontinuance of 

(1) Division III 

(2) Division IV. 

What course of action do you recommend for each division?

c. Prepare a condensed income statement in columns for Ribeiro Manufacturing, assuming division IV is eliminated. Use the CVP format. Division IV’s unavoidable fixed costs and expenses are allocated equally to the continuing divisions.

d. Reconcile the total income from operations of $145,000 with the total income from operations without division IV.

Transcribed Image Text:

Sales Cost of goods sold Selling and administrative expenses Income (loss) from operations I $510,000 300,000 60,000 $150,000 Cost of goods sold Selling and administrative expenses I 70% 40 Division II $390,000 250,000 80,000 $ 60,000 The analysis reveals the following percentages of variable costs in each division: III 75% 65 II 90% 50 III $310,000 270,000 65,000 $(25,000) IV $180,000 150,000 70,000 $ (40,000) IV 90% 70