Question

Sandhill Company has four operating divisions. During the first quarter of 2022, the company reported aggregate income from operations of $ 216,600 and the following divisional results.

Division
I II III IV
Sales $250,000 $198,000 $499,000 $447,000
Cost of goods sold 195,000 195,000 298,000 250,000
Selling and administrative expenses 70,400 63,000 57,000 49,000
Income (loss) from operations ($15,400) ($60,000) $144,000 $148,000

Analysis reveals the following percentages of variable costs in each division.
I II III IV
Cost of goods sold 74% 92% 78% 73%
Selling and administrative expenses 37 57 51 59

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.

Required:
Prepare a columnar condensed income statement for Sandhill Company, assuming Division II is eliminated. Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.

Answer 1

Income Statement for Sandhill Company with Division II eliminated:

Division                                                   I                   III                  IV

Sales                                               $250,000   $499,000   $447,000

Variable costs:

Cost of goods sold                           144,300    232,440     182,500

Selling and administrative

expenses                                           26,048       29,070         28,910

Total variable costs                       $170,348   $261,510      $211,410

Fixed costs:

Cost of goods sold                           53,300         68,160       70,100

Selling and administrative

expenses                                         48,867         32,445      24,605

Total fixed costs                           $102,167    $100,605     $94,705

Total costs                                   $272,515     $362,115    $306,115

Income (loss) from operations  ($22,515)    $136,885   $140,885

Data and Calculations:

Division                                                I           II              III            IV

Sales                                            $250,000 $198,000 $499,000  $447,000

Variable costs:

Cost of goods sold                        144,300    179,400    232,440     182,500

Selling and administrative

expenses                                       26,048      35,910      29,070        28,910

Total variable costs                   $170,348  $215,310  $261,510     $211,410

Fixed costs:

Cost of goods sold                        50,700      15,600      65,560       67,500

Selling and administrative

expenses                                      44,352      27,090      27,930      20,090

Total                                           $95,052   $42,690    $93,490    $87,590

Total costs                              $265,400 $258,000  $355,000 $299,000

Income (loss) from operations ($15,400) ($60,000)  $144,000  $148,000

50% of Division II's fixed costs = $21,345 ($42,690 x 50%)

Allocation of 50% of Division II's unavoidable fixed costs = $7,115 ($21,345/3)

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