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Okoboji Company manufactures wooden canoes, and has four operating divisions: East, West, North, and South. Each division manufactures a unique model of canoe. During the first quarter of 2017, total net operating income was $70,000. A breakdown by division was as follows:

East

West

North

South

Sales

$ 550,000

$750,000

$950,000

$450,000

COGS

  460,000

   480,000

   575,000

   400,000

S & A expenses

   120,000

   220,000

250,000

   125,000

Net Op. Income

$ ( 30,000)

  $ 50,000

$125,000

$ (75,000)

An internal cost analysis estimated that variable costs represented the following percentages of COGS and Selling/Administrative expenses in each division:

East

West

North

South

COGS

70%

85%

75%

60%

S & A expenses

50%

60%

65%

75%

Management is concerned about the two unprofitable divisions. Shutting down any division would eliminate about 60% of the fixed costs in that division.

(YOU SHOULD ANSWER THOSE QUESTIONS BELOW ACCORDING TO INFORMATION IS GIVEN ABOVE )

THANKS

1. Complete the following table to calculate the Contribution margin of each division.

East

West

North

South

Sales

$ 550,000

  $750,000

  $950,000

$450,000

Variable costs

   

  

  

  

Cont. margin

   

  

  

  

Fixed costs

Net Op. Income

       

2. Calculate the contribution margin ratio for each division.

3. Prepare separate schedules showing by how much (in dollars) companywide net operating income would increase or decrease as a result of shutting down each unprofitable division. First show the results of closing the South division only, then closing the East division only. Finally, show the results of closing both divisions.

4. Now assume that if the South division were eliminated, some of its customers would purchase canoes from the East division. Sales of the East division would rise to $600,000. Calculate the companywide net operating income after factoring in the closure of the South division and the new higher sales of the East division.

5. What others factors should be considered before the company shuts down any division?

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