The following segmented annual income statement is for Office Express. 

Management is concerned about the significant losses associated with the computers product line and would like to drop this product line. Allocated fixed costs are assigned to product lines based on sales. If the computers product line is eliminated, total allocated fixed costs are assigned to the remaining product lines, and all variable and direct fixed costs for the computers product line will be eliminated.

Required

a. Perform differential analysis using the format presented in Table 7.4. Assume keeping all product lines is Alternative 1, and dropping the computers product line is Alternative 2.

b. Which alternative is best? Explain.

c. Summarize the result of dropping the computers product line using the format presented in Table 7.5.

d. Explain what happened to the profitability of the furniture product line as a result of dropping the computers product line.

Table 7.4

Table 7.5

Transcribed Image Text:

Computers Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) $1,125,000 480,000 $ 645,000 650,000 112,500 $ (117,500) Product Lines Furniture $1,500,000 Supplies $375,000 Total $3,000,000 825,000 150,000 1,455,000 $ 675,000 $225,000 $1,545,000 480,000 150,000 105,000 37,500 $ 45,000 $ 82,500 1,235,000 300,000 $ 10,000