The following operating income data of Sam's Sportswear highlight the losses of the T-shirts product line:

Sam is considering discontinuing the T-shirts product line. The company's accountants estimate that dropping the T-shirts line will decrease the fixed cost of goods sold (fixed manufacturing expenses) by \(\$ 16,000\) and decrease fixed marketing and administrative expenses by \(\$ 12,000\).

Requirements 

1. Prepare an incremental analysis to show the impact on operating income if Sam drops the T-shirts product line. Should Sam drop the T-shirts line?

2. Prepare contribution margin income statements to compare Sam's total operating income

(a) with the T-shirts product line,

(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?

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Sales revenue Cost of goods sold: Variable Fixed Total cost of goods sold Gross profit Marketing and administrative expenses: Variable Fixed Total marketing and administrative expenses Operating income (loss) Product Line Total T-shirts Sweatshirts $730,000 $190,000 $540,000 $138,000 S 44,000 $ 94,000 61,000 20,000 41,000 199,000 64,000 135,000 531,000 126,000 405,000 223,000 98,000 125,000 93,000 38,000 55,000 316,000 136,000 180,000 $215,000 S (10,000) $225,000