Members of the board of directors of Security AlarmsSecurity Alarms have receive
ID: 2559566 • Letter: M
Question
Members of the board of directors of
Security AlarmsSecurity Alarms
have received the following operating income data for the year ended May 31, 2016 :
Security Alarms
Income Statement
For the Year Ended May 31, 2016
Product Line
Industrial
Household
Systems
Systems
Total
Sales Revenue
$300,000
$390,000
$690,000
Cost of Goods Sold:
Variable
33,000
43,000
76,000
Fixed
260,000
66,000
326,000
Total Cost of Goods Sold
293,000
109,000
402,000
Gross Profit
7,000
281,000
288,000
Selling and Administrative Expenses:
Variable
62,000
75,000
137,000
Fixed
43,000
26,000
69,000
Total Selling and Administrative Expenses
105,000
101,000
206,000
Operating Income (Loss)
$(98,000)
$180,000
$82,000
Members of the board are surprised that the industrial systems product line is not profitable. 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 $81,000 and decrease fixed selling and administrative expenses by $12,000
.
Prepare a differential analysis to show whether
Security Alarms
should drop the industrial systems product line.
2.
Prepare contribution margin income statements to show
Security Alarm'sSecurity Alarm'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?
requien 1 :
Expected decrease in revenues
Expected decrease in total variable costs
Expected decrease in fixed costs
Expected decrease in total costs
Expected decrease
in operating income
Requirement 1. Prepare a differential analysis to show whether
Security AlarmsSecurity Alarms
should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.)
Expected decrease in revenues
$(300,000)
Expected decrease in total variable costs
$95,000
Expected decrease in fixed costs
93,000
Expected decrease in total costs
188,000
Expected decrease
in operating income
$(112,000)
Requirement 2. Prepare contribution margin income statements to show
Security Alarm'sSecurity Alarm'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. (Use parentheses or a minus sign for an operating loss.)
Security Alarms
Contribution Margin Income Statement
For the Year Ended May 31, 2016
Totals With
Totals Without
Change if Industrial
Industrial Systems
Industrial Systems
Systems Is Dropped
Sales Revenue
Variable Costs:
Cost of Goods Sold
Selling and Administrative Expenses
Total Variable Costs
Contribution Margin
Fixed Costs:
Cost of Goods Sold
Selling and Administrative Expenses
Total Fixed Costs
Operating Income (Loss)
Enter any number in the edit fields and then click Check Answer.
Security Alarms
Income Statement
For the Year Ended May 31, 2016
Explanation / Answer
Requirement1: DIFFERENTIAL ANALYSIS Expected Decrease in Revenue(Of industrial Systems) Less: Expected Decrease in Total cost Decrease in Total Variable cost(33,000+62,000) $95,000 Decrease in Total Fixed cost(81,000+12,000) $93,000 Expected Decrease in Total Costs Expected Decrease in Operating income Requirement 2: Security Alarms Contribution Margin Income Statement For the year ending May 31, 2016 Totals With Totals Without Change Industrial Systems Industrial Systems If Ind. Systems Dropped Sales Revenue 690,000 390,000 -300,000 Variable Cost: Cost of Goods Sold 76,000 43,000 33,000 Selling and Administrative Expense 137,000 75,000 62,000 Total Variable Cost 213,000 118,000 95,000 Contribution Margin 477000 272000 -205,000 Fixed Costs: Cost of Goods Sold 326000 245000 81,000 Selling and Administrative Expense 69000 57000 12,000 Total Fixed Costs 395,000 302,000 93,000 Operating Income(Loss) 82000 -30000 -112,000 Req 3:Learnings: Expected Decrease in Revenue $300,000 Expected Decrease in Total Variable cost $95,000 Expected Decrease in Fixed costs $93,000 Expected decrease in Total cost $188,000 Expected Decrease in Operating income $112,000