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Members of the board of directors of 123 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. www.
Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $79,000 and decrease fixed marketing and administrative expenses by $12,000. Read the requirements.
1 2 3 4 A B C 123 Security Product Line Contribution Margin Income Statement For the Year Product lines 6 7 Sales revenue 8 Less cost of goods sold: 9 Variable 10 Fixed 11 Gross profit $ 12 Less marketing and administrative expenses: 13 Variable 14 Fixed 15 Operating income (loss) Print $ LA D Household Company Total Systems 360,000 $ 390,000 $750,000 34,000 43,000 77,000 270,000 67,000 337,000 280,000 $336,000 77,000 146,000 29,000 70,000 174,000 $ 120,000 Industrial Systems 56,000 $ 69,000 41,000 (54,000) $ Done
1. Prepare an incremental analysis to show whether 123 Security should discontinue the industrial systems product line. 2. Prepare contribution margin income statements to show 123 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?
Requirement 1. Prepare an incremental analysis to show whether 123 Security should discontinue the industrial systems product line. Incremental Analysis for Discontinuation Decision Total Contribution margin lost if Industrial Systems is discontinued Less: Fixed cost savings if Industrial Systems is discontinued Operating income if Industrial Systems is discontinued
Requirement 2. Prepare contribution margin income statements to show 123 Security's total operating income under the two atematives: (a) with the industrial systema line and (b) without the line Compare the difference between the two alternatives income numbers to your answer to Requirement 1. What have you leamed from this comparison? Begin by preparing the statements with and without the industrial systems sine, then prepare the contribution margin income statement showing the decrease if the industrial systems ine is discontinued. (Use parentheses or a minus sign for an operating loss) 123 Security Total Analysis of Discontinuing a Product Line Totals With Industrial Systems Totals Without Industrial Systems Difference Sales revenue Vable expenses Cost of goods sold Marketing and administrative expe Total vanable expens Coud of goods and Marketing and administrative expende Total s Contribution margin
The operating income difference calculated on the total analysis of discontinuing a product line Requirement 1. This demonstrates that the incremental analysis approach in Requirement yields the expected decrease in operating income if 123 Security discontinues the industrial systems product line, as shown in results as the longer approach in Requirement 2 that compares total operating income under the bed alamatives Time Remaining M