Question

Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $63.000 and decrease fund marketing and administrative expenses by 5,000 Members of the board of directors of Security Systems 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 wady to determine whether the company should continue the line Read the requirements m o duct line Data Table Requirement 1. Prepare an incremental analysis to show whether Security Systems should discontinue the industrial Incremental Analysis for Discontinuation Decision Contribution margin lost industrial Systems is discontinued Less: Fored cost savings if industrial Systems is discontinued Operating income industrial Systems is discontinued Security Systems Product Line Contribution Margin Income Statement For the Year i Requirements Product lines Industrial Household Company Systems Systems Total 300,000 $ 390,000 $ 750,000 Sales revenue $ Less cost of goods sold: 1. Prepare an incremental analysis to show whether Security Systems should discontinue the induial systems product line 2. Prepare contribution margin income wiatements to show Security Systems total Operating income under the two alternatives: (a) with the industrial systems line and b without the line. Compare e difference between the two Mernatives income numbers to your answer to Requirement 1. What have you learned from this comparison? Variable 31,000 270.000 $ 59,000 $ 279,000 S 338.000 Fixed Gross profit Loss marating and administrative expenses Variable Choose Print Dono 72.000 140,000 Food 68.000 43.000 52,000) S 3 remaining $ 100.000 $ 128,000 Operating income foss)

Answer 1

The incremental analysis for discontinuation decision is shown below
Incremental analysis for discontinuation decision
Contribution margin lost if industrial system is discontinued	$261,000
Less: Fixed cost savings if industrial systems is discontinued	$91,000	(83000+8000)
Operating income decrease if industrial system is discontinued	$170,000
Calculation of lost in contribution margin
Sales revenue	360000
Less: Variable costs
Cost of goods sold	31000
Marketing and administrative expense	68000
Contribution margin	261000
2
	Totals with industrial systems	Totals without industrial systems	Difference
Sales revenue	750000	390000	-360000
Variable expenses:
Cost of goods sold	73000	42000	31000
Marketing and administrative expense	140000	72000	68000
Total variable expenses	213000	114000	99000
Contribution margin	537000	276000	-261000
Fixed expenses:
Cost of goods sold	339000	256000	83000
Marketing and administrative expense	70000	62000	8000
Total fixed costs	409000	318000	91000
Operating income (loss)	128000	-42000	-170000
From the two requirement we can see that the decrease in operating income under two method is equal
That is the the above two requirement leads to same result