CASE STUDY 1 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. Division I Division II Division III Division IV Sales $510,000 $400,000 $310,000 $170,000 Cost of sales $300,000 $250,000 $270,000 $156,000 Selling and admin expenses $60,000 $80,000 $75,000 $70,000 Total profit $150,000 $70,000 ($35,000) ($56,000) Analysis reveals the following percentages of variable costs in each division. Division I Division II Division III Division IV Cost of sales 70% 80% 70% 90% Selling and admin expenses 40% 50% 60% 70% 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. Required: A. Prepare an incremental analysis concerning the possible discontinuance of i. Division III and ii. Division IV. B. Based on your analysis in above, what course of action do you recommend for each division? Justify your recommendation. C. Prepare a columnar condensed income statement for Panda Corporation, assuming Division IV is eliminated. 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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