Reference no: EM13985705

Prepare and use contribution margin statements for discontinuing a line decision (Learning Objective 4)

Members of the board of directors of Safety Systems have received the following operating income data for the year just ended:

	Product Line
	Industrial Systems	Household Systems	Total
Sales revenue	$330,000	$360,000	$690,000
Cost of goods sold:
Variable	$ 35,000	$  44,000	$ 79,000
Fixed	250,000	67,000	317,000
Total cost of goods sold	$285,000	$111,000	$396,000
Gross profit	$ 45,000	$249,000	294,000
Marketing and administrative expenses:
Variable	62,000	76,000	138,000
Fixed	39,000	23,000	62,000
Total marketing and administrative expenses	101,000	$ 99,000	200,000
Operating income (loss)	$ (56,000)	$150,000	$ 94,000

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 industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed marketing and administrative expenses by $14,000.

Requirements

1. Prepare an incremental analysis to show whether Safety Systems should discontinue the industrial systems product line.
2. Prepare contribution margin income statements to show Safety Systems' 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?