Members of the board of directors of Security First Security First have received the following operating income data for the year ended: May 31, 2018: 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 $80,000 and decrease fixed selling and administrative expenses by $12,000.
Read the requirements:
1. Prepare a differential analysis to show whether Safety Point Safety Point should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Safety Point's Safety Point'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?
Product Line
Industrial Household
Systems Total
Net Sales Revenue $340,000 $370,000 $710,000
Cost of Goods Sold:
Variable 36,000 46,000 82,000
Fixed 250,000 69,000 319,000
Total Cost of Goods Sold 286,000 115,000 401,000
Gross Profit 54,000 255,000 309,000
Selling and Administrative Expenses:
Variable 65,000 72,000 137,000
Fixed 45,000 22,000 67,000
Total Selling and Administrative Expenses 110,000 94,000 204,000
Operating Income (Loss) ($56,000) $161,000 $105,000
Requirement 1. Prepare a differential analysis to show whether
Security First Security First
should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.)
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 2. Prepare contribution margin income statements to show First's Security First's Security
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 First
Contribution Margin Income Statement
For the Year Ended May 31, 2018
Totals With
Totals Without
Change if Industrial
Industrial Systems
Industrial Systems
Systems Is Dropped
Net Sales Revenue
Variable Costs:
Manufacturing
Selling and Administrative
Total Variable Costs
Contribution Margin
Fixed Costs:
Manufacturing
Selling and Administrative
Total Fixed Costs
Operating Income (Loss)