Members of the board of directors of Safe Zone have received the following operat-ing income data for the year ended May 31, 2014:

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 $ 84,000 and decrease fixed selling and adminis-trative expenses by $ 14,000.

Requirements
1. Prepare a differential analysis to show whether Safe Zone should drop the ­industrial systems product line.
2. Prepare contribution margn income statements to show Safe Zone’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 Requirement2?

Transcribed Image Text:

SAFE ZONE income Statement For the Year Ended May 31, 2014 Product Line Industria Household Systems Systems Total Sales Revenue 370,000 $390,000 760,000 Cost of Goods Sold: 42,000 65,000 07,000 283,000 Variable Fixed Total Cost of Goods Sold Gross Profit Selling and Administrative Expenses 36,000 260,000 296,000 4,000 78,000 325,000 403,000 357,000 75,000 24,000 99,000 s (36,000) 184,000 Variable 66,000 44,000 110,000 141,000 68,000 209,000 s 148,000 Fixed Total Selling and Administrative Expenses Operating Income Loss)