Members of the board of directors of Safe Zone have received the following opera
ID: 2527814 • Letter: M
Question
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 Household Systems Systems Total 370,000 390,000 760,000 Sales revenue Cost of goods sold 42,000 78,000 65,000325,000 S 296,000 S 107,000 S403,000 $ 74,000 283,000 357,000 Variable Fixed Total cost of goods sold 36,000 260,000 Gross profit Marketing and administrative expense: Variable Fixed Total marketing and administrative exp 66,000 44,000 75,000141,000 24,000 68,000 $ 110,00099,000 209,000 36,00? 184,0001 s 148,000 Operating income (loss)Explanation / Answer
Answer:
1
Incremental Analysis of Discontinuing a Product Line
Expected decrease in revenues—
Dropping industrial systems sales
370,000
Expected decrease in expenses:
Variable expenses:
Cost of goods sold
36000
Marketing and administrative expenses
66,000
Fixed expenses:
Cost of goods sold
84000
Marketing and administrative expenses
14000
Expected decrease in total expenses
200000
Expected decrease in operating income
170,000
2
Total Analysis of Discontinuing a Product Line
Totals With
Industrial
Systems.
Totals Without
Industrial
Systems
Decrease if
Industrial
Systems Is
Discontinued
Sales revenue
760,000
390,000
370,000
Less Variable expenses:
Cost of goods sold
78000
42000
36,000
Marketing and administrative
141000
75000
66,000
Total variable expenses
219000
117000
102,000
Contribution margin
541,000
273,000
268,000
Less Fixed expenses:
Cost of goodsold
325000
241000
84,000
Marketing and administrative expenses
68000
54000
14,000
Total fixed xpenses
393000
295000
98,000
Operating income (loss)
148,000
-22,000
170,000
Working notes
a
= $325,000 ? $84,000
=241000
b
$ 68,000 ? $14,000
=54000
___________________________________
3
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.
Incremental Analysis of Discontinuing a Product Line
Expected decrease in revenues—
Dropping industrial systems sales
370,000
Expected decrease in expenses:
Variable expenses:
Cost of goods sold
36000
Marketing and administrative expenses
66,000
Fixed expenses:
Cost of goods sold
84000
Marketing and administrative expenses
14000
Expected decrease in total expenses
200000
Expected decrease in operating income
170,000