Prepare and use contribution margin statements for dropping a line decision

(Learning Objective 4)

The following operating income data of Abalone Seafood highlight the losses of the fresh seafood product line:

Abalone Seafood is considering discontinuing the fresh seafood product line. The company’s accountants estimate that dropping the fresh seafood line will decrease fixed cost of goods sold by $16,000 and decrease fixed marketing and administrative expenses by $10,000.
Requirements 1. Prepare an incremental analysis to show whether Abalone Seafood should drop the fresh seafood product line.
2. Prepare contribution margin income statements to compare Abalone Seafood’s total operating income

(a) with the fresh seafood product line and

(b) without it. Compare the difference between the two alternatives’ income numbers to your answer to Requirement 1. What have you learned from this comparison?

Transcribed Image Text:

Product Line Fresh Frozen Total Seafood Seafood Sales revenue. $730,500 $190,500 $540,000 Cost of goods sold: Variable $138,000 $ 44,000 $ 94,000 Fixed............. 61,000 20,000 41,000 Total cost of goods sold....... 199,000 64,000 135,000 Gross profit......... 531,500 126,500 405,000 Marketing and administrative expenses: Variable. 223,000 98,000 125,000 Fixed............ 93,000 38,000 55,000 Total marketing and administrative expenses... 316,000 136,000 180,000 Operating income (loss)..... $215,500 $ (9,500) $225,000