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E7-8 Prepare incremental analysis concerning make-or-buy decision.
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse

Exercise E7-8 Innova uses 1,000 units of the component IMC2 every month to manufacture one
of its products. The unit costs incurred to manufacture the component are as follows:

Direct materials $65.00


Direct labor 45.00
Overhead 126.50
Total $236.50

Overhead costs include variable material handling costs of $6.50 , which are applied to products
on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct lab
dollars and consist of 60% variable costs and 50% fixed costs.
A vendor has offered to supply the IMC2 component at a price of $200.00 per unit.

Instructions:
(a) Should Innova purchase the component from the outside vendor if Innovas capacity remains idle?

Net Income
Make Buy Increase
IMC2 IMC2 (Decrease)
Direct material $65.00 $0.00 $65.00
Direct labor 45.00 0.00 45.00
Material handling 6.50 0.00 6.50
Variable overhead* 72.00 0.00 72.00
Purchase price 0.00 200.00 (200.00)
Total unit cost $188.50 $200.00 ($11.50)

*Variable overhead = ($126.50 - $6.50) 60%

The unit should not be purchased from the outside vendor, as the per unit cost would be
$11.50 greater than if they made it.

(b) Should Innova purchase the component from the outside vendor if it can use its facilities to manufacture
another product? What information will Innova need to make an accurate decision? Show your calculations.

In order for Innova to make an accurate decision, they would have to know the opportunity cost of
manufacturing the other product. As determined in (a), purchasing the product from outside would cost
$11,500 more (1,000 $11.50). Innova would have to increase their contribution margin by more than
$11,500 through the manufacture of the other product, before it would be economical for them to purchase the
IMC2 from the outside vendor.

(c) What are the qualitative factors that Innova will have to consider when making this decision?
Qualitative factors to consider would be (1) quality of the component (2) on-time delivery, and (3) reliability
of the vendor.

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E7-10 Determine whether to sell or process further, joint products
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse
Exercise E7-10 Stahl Inc. produces three separate products from a common process costing $100,000
Each of the products can be sold at the split-off point or can be processed further and then sold for a
higher price. Shown below are cost and selling price data for a recent period.

Sales Sales Value


Value at Cost to After
Split-off Process Further
Point Further Processing
Product 10 $60,000 $100,000 $190,000
Product 12 15,000 30,000 35,000
Product 14 55,000 150,000 215,000
Instructions:
(a) Determine total net income if all products are sold at the split-off point.
Sales = $60,000 + $15,000 + $55,000 = $130,000
Joint costs = 100,000
Net income = $30,000
(b) Determine total net income if all products are sold after further processing.
Sales = $190,000 + $35,000 + $215,000 = $440,000
Joint costs = (100,000)
Additional costs $100,000 + $30,000 + $150,000 = (280,000)
Net income = $60,000
(c) Using incremental analysis, determine which products should be sold at the split-off point and which
should be processed further.
Product 10 Product 12 Product 14
Incremental Revenue (1)
$130,000 $20,000 $160,000
Incremental costs (100,000) (30,000) (150,000)
Incremental profit (loss) $30,000 ($10,000) $10,000

(1)
Sales value after further processing - Sales value @ split-off point.

Products 10 and 14 should be processed further and product 12 should be sold at the split-off point.

(d) Determine total net income using the results from (c) and explain why the net income is different
from that determined in (b).
Sales = $190,000 + $15,000 + $215,000 = $420,000
Joint costs = (100,000)
Additional costs $100,000 + $0 + $150,000 = (250,000)
Net income = $70,000
Net income is $10,000 ($70,000 - $60,000) higher in (d) than in (b) because product 12 is not processed
further, thereby increasing overall profit $10,000.

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E7-11 Determine whether to sell or process further, joint products
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse

Exercise E7-11 Chen Minerals processes materials extracted from mines. The most common raw material
that it processes results in three joint products: Larco, Marco, and Narco. Each of these products can be sold
as is, or it can be processed further and sold for a higher price. The company incurs joint costs $180,000
of
to process one batch of the raw material that produces the three joint products. The following cost and sales
information is available for one batch of each product.
Sales Value at Allocated Joint Costs Cost to Further Process Sales Value of
Split-off Point Processed Product
Larco $200,000 $40,000 $110,000 $300,000
Marco 300,000 60,000 85,000 400,000
Narco 405,000 80,000 250,000 800,000

Instructions:
Determine whether each of the three joint products should be sold as is, or processed further.

To determine whether each of the three joint products should be sold as is, or processed further, we must
determine the incremental profit or loss that would be earned by each. The allocated joint costs are
irrelevant to the decision since these costs will not change whether or not the products are sold as is or
processed further.

Larco Marco Narco


Incremental revenue $100,000 $100,000 $395,000
Incremental cost (110,000) (85,000) (250,000)
Incremental profit (loss) ($10,000) $15,000 $145,000

Incremental revenue is Sales Value of Processed Product minus Sales Value at Split-off Point

From this analysis we see that Marco and Narco should be processed further because the incremental
revenue exceeds the incremental costs, but Larco should be sold as is.

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E7-15 Use incremental analysis concerning elimination of division
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse

E7-15 Judy Jean, a recent graduate of Rolling's accounting program, evaluated the operating performance of
Artie Company's six divisions. Judy made the following presentation to Artie's Board of Directors and
suggested the Huron Division be eliminated. "If the Huron Division is eliminated," she said, "our total
profits would increase by $24,500.

The Other Five Divisions Huron Division Total


Sales $1,664,200 $100,000 $1,764,200
Cost of goods sold 978,520 76,000 $1,054,520
Gross profit 685,680 24,000 $709,680
Operating expenses 527,940 50,000 $577,940
Net income $157,740 ($26,000) $131,740

In the Huron Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating
expenses are $26,000 variable and $24,000 fixed. None of the Huron Division's fixed costs
will be eliminated if the division is discontinued.
Instructions:
Is Judy right about eliminating the Huron Division? Prepare a schedule to support your answer.

Net Income
Increase
Continue Eliminate (Decrease)
Sales $100,000 $0 ($100,000)
Variable expenses
Cost of goods 61,000 0 (61,000)
sold
Operating 26,000 0 (26,000)
expenses
Total variable 87,000 0 (87,000)
Contribution 13,000 0 (13,000)
Fixed margin
expenses
Cost of goods 15,000 15,000 0
sold
Operating 24,000 24,000 0
expenses
Total fixed 39,000 39,000 0
Net income (loss) ($26,000) ($39,000) ($13,000)

Judy is incorrect. The incremental analysis shows that net income will be $13,000 less if the Huron Division
is eliminated. This amount equals the contribution margin that would be lost through discontinuing the
division.
(Note: None of the fixed costs can be avoided.)
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Judy is incorrect.
Date: The incremental analysis shows that net income will be $13,000 less if the Huron Division
is eliminated. This amount equals the contribution margin that would be lost through discontinuing the
division.
(Note: None of the fixed costs can be avoided.)

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P7-3A Determine if products should be sold or processed further
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse

Problem P7-3A Sutton Industrial Products Co. (SIPC) is a diversified industrial-cleaner processing company. The
company's Verde plant produces two products: a table cleaner and a floor cleaner from a common set of
chemical inputs (CDG). Each week 900,000 ounces of chemical input are processed at a cost
of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces
of table cleaner. The floor cleaner has no market value until is converted into a polish with the trade name
FloorShine. The additional processing costs for this conversion amount to $240,000
FloorShine sells at $20 per 30 -ounce bottle. The table cleaner can be sold for
$18 per 25 -ounce bottle. However, the table cleaner can be converted into two other
products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces
of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and
table polish (TP). The additional processing costs for this process amount to $100,000 Both table products
can be sold for $14 per 25 -ounce bottle.
The company decided not to process the table cleaner into TSR and TP based on the following analysis.
Process Further
Table Cleaner Table Stain Remover (TSR) Table Polish (TP) Total
Production in ounces 300,000 300,000 300,000
Revenue $250,000 $168,000 $168,000 $336,000
Costs:
CDG costs * ** 70,000 52,500 52,500 105,000
TCP costs 0 50,000 50,000 100,000
Total costs 70,000 102,500 102,500 205,000
Weekly gross profit $180,000 $65,500 $65,500 $131,000
* If table cleaner is not processed further it is allocated 1/3 of the $210,000 of CDG
cost, which is equal to 1/3 of the total physical output.
** If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined
account for 50% of the total physical output and are each allocated 25% of the
CDG cost.

Instructions:
(a)(1) Determine if management made the correct decision to not process the table cleaner further by calculating
the company's total weekly gross profit assuming the table cleaner is not processed further.

Sales:
FloorShine ((600,000 30) $20) $400,000
Table Cleaner ((300,000 25) $18) 216,000
Total revenue $616,000
Costs:
CDG 210,000
Additional costs of FloorShine 240,000

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Total costs 450,000
Gross profit $166,000

(a)(2) Determine if management made the correct decision to not process the table cleaner further by calculating
the company's total weekly gross profit assuming the table cleaner is processed further.

Sales:
FloorShine ((600,000 25) $20) $400,000
Table Stainer Remover ((300,000 25) $14) 168,000
Table Polish ((300,000 25) $14) 168,000
Total revenue $736,000
Costs:
CDG 210,000
Additional costs of FloorShine 240,000
TCP 100,000
Total costs 550,000
Gross profit $186,000

(a)(3) Compare the resulting net incomes and comment on management's decision.

If the table cleaner is processed further overall company profits will be $20,000 higher. Therefore, management
made the wrong decision by choosing to not process table cleaner further.

(b) Using incremental analysis, determine if the table cleaner should be processed further.

Dont
Process
Table Process Table Net Income
Cleaner Cleaner Increase
Further Further (Decrease)
Incremental revenue $216,000 $336,000 $120,000
Incremental costs 0 (100,000) (100,000)
Totals $216,000 $236,000 $20,000

When trying to decide if the table cleaner should be processed further into TSR and TP, only the relevant data need
be considered. All of the costs that occurred prior to the creation of the table cleaner are sunk costs and can be
ignored. The decision should be made by comparing the incremental revenue from further processing to the
incremental costs.

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P7-5A Prepare incremental analysis concerning elimination of divisions.
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse

Problem P7-5A Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported
aggregate income from operations of $213,000 and the following divisional results.
Division
I II III IV
Sales $250,000 $200,000 $500,000 $450,000
Cost of goods sold 200,000 192,000 300,000 250,000
Selling and administrative expenses 75,000 60,000 60,000 50,000
Income (loss) from operations ($25,000) ($52,000) $140,000 $150,000
Analysis reveals the following percentages of variable costs in each division.
I II III IV
Cost of goods sold 75% 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
continued.

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

Division I Division II
Sales $250,000 $200,000
Variable costs
Cost of goods sold 150,000 172,800
Selling and administrative 30,000 42,000
Total variable expenses 180,000 214,800
Contribution margin $70,000 ($14,800)

(b)(1) Prepare an incremental analysis concerning the possible discontinuance of Division I.

Net Income
Increase
Division I Continue Eliminate (Decrease)
Contribution margin (above) $70,000 $0 ($70,000)
Fixed costs
Cost of goods sold 50,000 25,000 (25,000)
Selling and administrative 45,000 22,500 (22,500)
Total fixed expenses 95,000 47,500 (47,500)
Income (loss) from operations ($25,000) ($47,500) ($22,500)
(b)(2) Prepare an incremental analysis concerning the possible discontinuance of Division II.

Net Income
Increase
Division II Continue Eliminate (Decrease)
Contribution margin (above) ($14,800) $0 $14,800
Fixed costs
Cost of goods sold 19,200 9,600 (9,600)
Selling and administrative 18,000 9,000 (9,000)
Total fixed expenses 37,200 18,600 (18,600)

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Income (loss) from operations ($52,000) ($18,600) $33,400

(b)(3) What course of action do you recommend for each division?


Division II should be eliminated as its negative contribution margin is $14,800. Income from operations would increase $33,400 if
Division II is eliminated.

Division I should be continued because it is producing positive contribution margin of $70,000. Income from operations will decrease
$22,500 by discontinuing this division.

(c) Prepare a columnar condensed income statement for Moreno Manufacturing, assuming Division II is eliminated. Use the CVP
format. Division II's unavoidable fixed costs are allocated equally to the continuing divisions.

GUTIERREZ MANUFACTURING COMPANY


CVP Income Statement
For the Quarter Ended March 31, 2014
Divisions
I III IV Total
Sales $250,000 $500,000 $450,000 $1,200,000
Variable costs
Cost of goods sold 150,000 240,000 187,500 577,500
Selling and administrative 30,000 30,000 30,000 90,000
Total variable costs 180,000 270,000 217,500 667,500
Contribution margin 70,000 230,000 232,500 532,500
Fixed costs
Cost of goods sold (1) 53,200 63,200 65,700 182,100
Selling and administrative (2) 48,000 33,000 23,000 104,000
Total fixed costs 101,200 96,200 88,700 286,100
Income (loss) from operations ($31,200) $133,800 $143,800 $246,400

(1) Divisions fixed cost of goods sold plus 1/3 of Division IIs unavoidable fixed cost of goods sold [$192,000 (100% 90%)
50% = $9,600]. Each divisions share is $3,200.

(2) Divisions fixed selling and administrative expense plus 1/3 of Division IIs unavoidable fixed selling and administrative expenses
[$60,000 (100% 70%) 50% = $9,000]. Each divisions share is $3,000.

(d) Reconcile the total income from operations, $213,000 with the total income from operations without Division II.

Income from operations with Division II of $213,000 (given) plus incremental income of $33,400 from eliminating Division II =
$246,400 income from operations without Division II.

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P7-3B Determine if product should be sold or processed further
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse
Problem P7-3B Ohio Household Products Co. (OHPC) is a diversified household-cleaner processing company.
The companys Mishawaka plant produces two products: an appliance cleaner and a general-purpose cleaner
from a common set of chemical inputs (NPR). Each week 1,000,000 ounces of chemical input are
processed at a cost of $200,000 into 750,000 ounces of appliance cleaner and
250,000 ounces of general-purpose cleaner. The appliance cleaner has no market value until it is converted int
a polish with the trade name Shine Brite. The additional processing costs for this conversion amount
Shine Brite sells at $15 per 25 ounce bottle. The general-purpose cleaner can be
sold for $20 per 20 ounce bottle. However, the general-purpose cleaner can be
converted into two other products by adding 250,000 ounces of another compound (PST) to the
250,000 ounces of general-purpose cleaner. This joint process will yield 250,000 ounces each of premium
cleaner (PC) and premium stain remover (PSR). The additional processing costs for this process amount to
$140,000 Both premium products can be sold for $16 per 20
bottle.
The company decided not to process the general purpose cleaner into PC and PSR based on the following anal
Process Further
General-Purpose Premium Stain
Cleaner Premium Cleaner (PC) Remover (PSR)
Production in ounces 250,000 250,000 250,000
Revenue $250,000 $200,000 $200,000
Costs:
NPR costs * ** 50,000 40,000 40,000
PST costs 0 70,000 70,000
Total costs 50,000 110,000 110,000
Weekly gross profit $200,000 $90,000 $90,000
* If general-purpose cleaner is not processed further it is allocated 1/4 of the
of NPR cost, which is equal to 1/4 of the total physical output.
** If general-purpose cleaner is processed further, total physical output is 1,250,000 ounces. PC and PSR
combined account for 40% of the total physical output and are each allocated 20%
NPR cost.
Instructions:
(a)(1) Determine if management made the correct decision to not process the general-purpose cleaner further by
calculating the company's total weekly gross profit assuming the general-purpose cleaner is not processed
further.
Sales:
ShineBrite ((750,000 25) $15) $450,000
General-Purpose Cleaner ((250,000 20) $20) 250,000

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Total revenues $700,000
Costs:
NPR 200,000
Additional costs for ShineBrite 300,000
Total costs 500,000
Gross profit $200,000
(a)(2) Determine if management made the correct decision to not process the general-purpose cleaner further by
calculating the company's total weekly gross profit assuming the general-purpose cleaner is processed further.

Sales:
ShineBrite ((750,000 25) $15) $450,000
Premium Cleaner ((250,000 20) $16) 200,000
Premium Stain Remover ((250,000 20) $16) 200,000
Total revenue $850,000
Costs:
NPR 200,000
Additional costs for ShineBrite 300,000
PST 140,000
Total costs 640,000
Gross profit $210,000
(a)(3) Compare the resulting net incomes and comment on management's decision.
If the general-purpose cleaner is processed further overall company profits will be $10,000 higher. Therefore,
management made the wrong decision by choosing to not process general-purpose cleaner further.

(b) Using incremental analysis, determine if the general-purpose cleaner should be processed further.

Dont
Process Process
G-P G-P Net Income
Cleaner Cleaner Increase
Further Further (Decrease)
Incremental revenue $250,000 $400,000 $150,000
Incremental costs 0 (140,000) (140,000)
Totals $250,000 $260,000 $10,000
When trying to decide if the general-purpose cleaner should be processed further into PC and PSR, only the
relevant data need be considered. All of the costs that occurred prior to the creation of the general-purpose
cleaner are sunk costs and can be ignored. The decision should be made by comparing the incremental revenue
from further processing to the incremental costs.

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When trying Name:
to decide if the general-purpose cleaner should be processed further into PC and PSR, only the
relevant data need be considered. All of the costs that occurred prior to the creation of the general-purpose
Course:
cleaner are sunk costs and can be ignored. The decision should be made by comparing the incremental revenue
Date:
from further processing to the incremental costs.

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r processing company.
ral-purpose cleaner
mical input are
iance cleaner and
until it is converted int
$300,000
urpose cleaner can be
e cleaner can be
d (PST) to the
unces each of premium
rocess amount to
ounce

ed on the following anal

Total

$400,000

80,000
140,000
220,000
$180,000
$200,000

unces. PC and PSR


of the

pose cleaner further by


is not processed

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pose cleaner further by
is processed further.

0 higher. Therefore,
r further.

sed further.

and PSR, only the


general-purpose
incremental revenue

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P7-5B Prepare incremental analysis concerning elimination of divisions.
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse

Problem P7-5B 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 II III IV
Sales $510,000 $400,000 $310,000 $170,000
Cost of goods sold 300,000 250,000 270,000 156,000
Selling and administrative expenses 60,000 80,000 75,000 70,000
Income (loss) from operations $150,000 $70,000 ($35,000) ($56,000)
Analysis reveals the following percentages of variable costs in each division.
I II III IV
Cost of goods sold 70% 80% 70% 90%
Selling and administrative expenses 40% 50% 60% 70%
Discontinuance of any division would save 50% of the fixed costs and expenses for that division.
Top management is deeply concerned about the unprofitable divisions (III and IV ). Consensus is that one or both of the divisions
should be discontinued.

Instructions:
(a) Compute the contribution margin for for Divisions III and IV.

III IV
Sales $310,000 $170,000
Variable expenses
Cost of goods sold 189,000 140,400
Selling and administrative 45,000 49,000
Total variable expenses 234,000 189,400
Contribution margin $76,000 ($19,400)

(b)(1) Prepare an incremental analysis concerning the possible discontinuance of Division III.

Net Income
Increase
Division III Continue Eliminate (Decrease)
Contribution margin (above) $76,000 $0 ($76,000)
Fixed expenses
Cost of goods sold 81,000 40,500 40,500
Selling and administrative 30,000 15,000 15,000
Total fixed expenses 111,000 55,500 55,500
Income (loss) from operations ($35,000) ($55,500) ($20,500)

(b)(2) Prepare an incremental analysis concerning the possible discontinuance of Division IV.

Net Income
Increase
Division IV Continue Eliminate (Decrease)
Contribution margin (above) ($19,400) $0 $19,400
Fixed expenses
Cost of goods sold 15,600 7,800 7,800
Selling and administrative 21,000 10,500 10,500
Total fixed expenses 36,600 18,300 18,300

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Income (loss) from operations ($56,000) ($18,300) $37,700

(b)(3) What course of action do you recommend for each division?


Division III should be continued as contribution margin ($76,000) is greater than the savings in fixed costs ($55,500) that would result
from elimination. Therefore, income from operations would decrease $20,500 if Division III is eliminated.

Division IV should be eliminated because it is producing negative contribution margin ($19,400). Income from operations will
increase $37,700 by discontinuing this division.

(c) Prepare a columnar condensed income statement for Panda Corporation, assuming Division IV is eliminated. Use the CVP format.
Division IVs unavoidable fixed costs are allocated equally to the continuing divisions.

PANDA CORPORATION
CVP Income Statement
For the Quarter Ended March 31, 2011
Divisions
I II III Total
Sales $510,000 $400,000 $310,000 $1,220,000
Variable expenses
Cost of goods sold 210,000 200,000 189,000 599,000
Selling and administrative 24,000 40,000 45,000 109,000
Total variable expenses 234,000 240,000 234,000 708,000
Contribution margin 276,000 160,000 76,000 512,000
Fixed expenses
Cost of goods sold (1) 92,600 52,600 83,600 228,800
Selling and administrative (2) 39,500 43,500 33,500 116,500
Total fixed expenses 132,100 96,100 117,100 345,300
Income (loss) from operations $143,900 $63,900 ($41,100) $166,700

(1) Divisions fixed cost of goods sold plus 1/3 of Division IVs unavoidable fixed cost of goods sold [$156,000 (100% 90%)
50% = $7,800]. Each divisions share is $2,600.

(2) Divisions fixed selling and administrative expenses plus 1/3 of Division IVs unavoidable fixed selling and administrative
expenses [$70,000 (100% 70%) 50% = $10,500]. Each divisions share is $3,500.

(d) Reconcile the total income from operations $135,000 with the total income from operations without Division
IV.
Income from operations with Division IV of $135,000 (given) plus incremental income of $37,700 from eliminating Division IV =
$166,700 income from operations without Division IV.

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