Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008,

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

                                  I                          II                       III                      IV 

Sales                         $250,000           $200,000         $500,000           $400,000

Cost of goods sold       200,000              189,000           300,000              250,000

Selling administrative expenses  65,000      60,000             60,000                 50,000

Income (loss) from operations $(15,000)      $(49,000)          $140,000            $100,000

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

                                                         I           II                  III                IV 

Cost of goods sold                      70%           90%            80%               75%

Selling and administrative expenses  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 (I and II). Consensus is that one or both of the divisions should be discontinued.

Instructions

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

(a) I $84,000

(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 costs are allocated equally to the continuing divisions.

         (c) Income III $133,850

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