Prepare and use contribution margin statements for discontinuing a line decision
ID: 2413571 • Letter: P
Question
Prepare and use contribution margin statements for discontinuing a line decision (Learning Objective 4) Members of the board of directors of Security Alliance have received the following operating income data for the year just ended P8-50A Security Alliance Product Line Contribution Margin Income Statement For the Year Product lines Industrial Systems Household Systems Company Total 6 Sales revenue 7Less cost of goods sold 8 Variable 9 Fixed 10 Gross profit 11 Less marketing and administrative expenses: 12 Variable 13 Fixed 14 Operating income (loss 15 310,000 $ 380,000 $ 690,000 32,000 280,000 (2,000 46,000 66,000 268,000 78,000 346,000 266,000 63,000 37,000 102,000 69,000 23,000 176,000 132,000 60,000 74,000 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 discontinue the line. Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $80,000 and decrease fixed marketing and administrative expenses by $11,000Explanation / Answer
Answer:
1
Adobe Security
Incremental Analysis of Discontinuing a Product Line
Amount $
Amount $
Expected decrease in revenues—
Dropping industrial systems sales
310,000
Expected decrease in expenses:
Variable expenses:
Cost of goods sold
32000
Marketing and administrative expenses
63000
Fixed expenses
Cost of goods sold
80,000
Marketing and administrative expenses
11,000
Expected decrease in total expenses
186,000
Expected decrease in operating income
124,000
Decision: Do not discontinue Industrial Systems.
_______________________________________________________________
2
Adobe Security
Incremental Analysis of Discontinuing a Product Line
Totals With
Industrial
System
Totals Without
Industrial
Systems
Decrease if
Industrial
Systems Is
Discontinued
Sales Revenue
690,000
380,000
310,000
Less: Variable expenses:
Cost of goods sold
78000
46000
32,000
Marketing and administrative expenses
132000
69000
63,000
Total variable cost
210000
115000
95,000
Contribution margin
480,000
265,000
215,000
Less: Fixed expenses
Cost of goods sold
380,000
300,000
80,000
Marketing and administrative expenses
37,000
26,000
11,000
Total Fixed expenses
417,000
326,000
91,000
Operating income (loss)
63,000
-61,000
124,000
The operating income difference calculated on the total analysis of discontinuing a product line equals the expected decrease in operating income if Adobe Security One discontinues the industrial systems line as shown in Req. 1. This demonstrates that the incremental analysis approach in Req. 1 does yield the same results as the longer approach in Req. 2 that compares total operating income under the two alternatives.
Adobe Security
Incremental Analysis of Discontinuing a Product Line
Amount $
Amount $
Expected decrease in revenues—
Dropping industrial systems sales
310,000
Expected decrease in expenses:
Variable expenses:
Cost of goods sold
32000
Marketing and administrative expenses
63000
Fixed expenses
Cost of goods sold
80,000
Marketing and administrative expenses
11,000
Expected decrease in total expenses
186,000
Expected decrease in operating income
124,000