Question

The condensed product-line income statement for Porcelain Tableware Company for the month of May is as follows:

Porcelain Tableware Company
Product-Line Income Statement
For the Month Ended May 31

Bowls Plates Cups
Sales $65,400 $89,800 $26,300 Cost of goods sold 27,000 33,600 13,900 Gross profit $38,400 $56,200 $12,400 Selling and administrative expenses 28,700 35,000 16,300 Income from operations $9,700 $21,200 $(3,900)

Fixed costs are 12% of the cost of goods sold and 37% of the selling and administrative expenses. Porcelain Tableware assumes that fixed costs would not be materially affected if the Cups line were discontinued.

a. Prepare a differential analysis dated May 31 to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis

Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)

For the Month Ended May 31

	Continue Cups (Alternative 1)	Discontinue Cups (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$
Costs:
Variable cost of goods sold
Variable selling and admin. expenses
Fixed costs
Income (Loss)

b. Should the Cups line be retained? Explain.
....................................

As indicated by the differential analysis in part (a), the income will ................................................. by $............................... if the Cups line is discontinued.

Answer 1

	Calculation of Fixed Cost
			Bowls	Plates	Cups	Total
	Cost of Goods Sold		27,000.00	33,600.00	13,900.00	74,500.00
	Selling and administrative expenses		28,700.00	35,000.00	16,300.00	80,000.00
	Fixed Cost on COGS		3,240.00	4,032.00	1,668.00	8,940.00
	Fixed Cost on Selling Expense		10,619.00	12,950.00	6,031.00	29,600.00
	Total Fixed Cost		13,859.00	16,982.00	7,699.00	38,540.00
	Variable Cost on COGS		23,760.00	29,568.00	12,232.00	65,560.00
	Variable Cost on Selling Expense		18,081.00	22,050.00	10,269.00	50,400.00
	Total		41,841.00	51,618.00	22,501.00	1,15,960.00
	If the Cups business is discontinued, than the Fixed cost of 7,699 will recovered from Bowls and Plates Business
			Continue Cups (Alternative 1)	Discontinue Cups (Alternative 2)
	Sales		1,81,500.00	1,55,200.00
	Less
	Variable Cost of Goods Sold		65,560.00	53,328.00
	Variable Selling and administrative expenses		50,400.00	40,131.00
	Fixed Cost		38,540.00	38,540.00
	Income/Loss		27,000.00	23,201.00	3,799.00
A)	Its Better to continue the Cups business, as profit is higher
B)	As indicated by the differential analysis in part (a), the income will decrease by $ 3,799 if the Cups line is discontinued.