P20-23A Making dropping a product and product-mix decisions
P20-23A Members of the board of directors of Safe Zone have received the following operating
income data for the year ended May 31, 2012
SAFE ZONE
Income Statement
For the Year Ended May 31, 2012
Product Line
| |||
Industrial
Systems
|
Household
Systems
|
Total
| |
Sales revenue
|
$ 370,000
|
$ 390,000
|
$ 760,000
|
Cost of goods sold:
| |||
Variable
|
36,000
|
42,000
|
78,000
|
Fixed
|
260,000
|
65,000
|
325,000
|
Total cost of goods sold
|
$ 296,000
|
$ 107,000
|
$ 403,000
|
Gross profit
|
$ 74,000
|
$ 283,000
|
$ 357,000
|
Marketing and administrative expenses:
| |||
Variable
|
66,000
|
75,000
|
141,000
|
Fixed
|
44,000
|
24,000
|
68,000
|
Total marketing and administrative exp.
|
$ 110,000
|
$ 99,000
|
$ 209,000
|
Operating income (loss)
|
$ (36,000)
|
$ 184,000
|
$ 148,000
|
Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $84,000 and decrease fixed marketing and administrative expenses by $14,000.
Requirements
1. Prepare an incremental analysis to show whether Safe Zone should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Safe Zone’s total operating income under the two alternatives:
(a) with the industrial systems line and
(b) without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
TUTORIAL PREVIEW
Req. 1
Safe Zone
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Incremental Analysis of Dropping a Product Line
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Expected decrease in revenues—
| ||
Dropping industrial systems sales
|
$(370,000)
| |
Expected decrease in expenses:
| ||
Variable expenses:
| ||
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