Members of the board of directors of 123 Security123 Security
have received the following operating income data for the year just ended:
(Click the icon to view the operating income data.)
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 discontinue the line.
Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $ 83 comma 000$83,000
and decrease fixed marketing and administrative expenses by
$ 13 comma 000$13,000.
Read the requirementsLOADING…
.
Requirement 1. Prepare an incremental analysis to show whether 123 Security123 Security
should discontinue the industrial systems product line.
| Incremental Analysis for Discontinuation Decision |
Total |
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Contribution margin lost if Industrial Systems is discontinued |
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Less: Fixed cost savings if Industrial Systems is discontinued |
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Operating income |
if Industrial Systems is discontinued |
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Requirement 2. Prepare contribution margin income statements to show 123 Security’s123 Security‘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. What have you learned from this comparison?
Begin by preparing the statements with and without the industrial systems line, then prepare the contribution margin income statement showing the decrease if the industrial systems line is discontinued. (Use parentheses or a minus sign for an operating loss.)
| 123 Security | ||
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Total Analysis of Discontinuing a Product Line |
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Totals With |
Totals Without |
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Industrial Systems |
Industrial Systems |
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Sales revenue |
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Variable expenses: |
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Cost of goods sold |
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Marketing and administrative expense |
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Total variable expenses |
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Contribution margin |
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Fixed expenses: |
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Cost of goods sold |
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Marketing and administrative expense |
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Total fixed expenses |
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Operating income (loss) |
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Difference |
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What have you learned from this comparison?
The operating income difference calculated on the total analysis of discontinuing a product line ▼
does not equal
equals
the expected decrease in operating income if
123 Security123 Security
discontinues the industrial systems product line, as shown in Requirement
1.
This demonstrates that the incremental analysis approach in Requirement 1 yields ▼
different
the same
results as the longer approach in Requirement 2 that compares total operating income under the two alternatives.
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