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Members of the board of directors of Security Force 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 a study to determine whether the company should discontinue the line Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $82,000 and decrease fixed marketing and administrative expenses by $12,000. Read the requirements Incremental Analysis for Discontinuation Decision Total Contribution margin lost if Industrial Systems is discontinued Less: Fixed cost savings if Industrial Systems is discontinued Operating income if Industrial Systems is discontinued Requirement 2. Prepare contribution margin income statements to show Security Force'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. What have you learned from this comparison? Begin by preparing the statements with and without the industrial systems line, then prepare the contribution margin income statement showing the decrease if the industrial systems line is discontinued. (Use parentheses or a minus sign for an operating loss.) Security Force Total Analysis of Discontinuing a Product Line Data Table - X i Requirements Totals With Totals Without Industrial Systems A B D Industrial Systems Difference 1 Sales revenue Variable expenses Cost of goods sold | | | Security Force Product Line Contribution Margin Income Statement For the Year 1. Prepare an incremental analysis to show whether Security Force should discontinue the industrial systems product line. 2. Prepare contribution margin income statements to show Security Force'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. What have you learned from this comparison? 6 Product lines Industrial Household Company Systems Systems Total $ 280,000 $ 380,000 $ 660,000 Print Done 7 Sales revenue Marketing and administrative expense Total variable expenses Contribution margin Fixed expenses Cost of goods sold Marketing and administrative expense 8 Less cost of goods sold: Variable 9 31,000 44,000 75,000 10 Fixed 260,000 64,000 324,000 Total fixed expenses 11 Gross profit $ (11,000 $ 272,000 $ 261,000 Operating income (loss) 12 Less marketing and administrative expenses 13 Variable 67,000 72,000 139,000 Choose from any list or enter any number in the input fields and then continue to the next question. 14 Fixed 42,000 22,000 64,000 15 Operating income (loss) $ (120,000 $ 178,000 $ 58,000 Vision Chemical has spent $242,000 to refine 73,000 gallons of acetone, which can be sold for $1.90 a gallon. Alternatively, Vision Chemical can process the acetone further. This processing will yield a total of 60,000 gallons of lacquer thinner that can be sold for $3.30 a gallon. The additional processing will cost $0.60 per gallon of lacquer thinner. To sell the lacquer thinner, Vision Chemical must pay shipping of $0.20 a gallon and administrative expenses of $0.15 a gallon on the thinner Requirements 1. Identify the sunk cost. Is the sunk cost relevant to Vision's decision? Why or why not? 2. Should Vision sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. Requirement 1. Identify the sunk cost. Is the sunk cost relevant to Vision's decision? Why or why not? The is a sunk cost that differ between alternatives of selling as is or processing to the sell or process further decision further. Consequently, this sunk cost of Requirement 2. Should Vision sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. (Enter a "0" for any zero amounts. Use a minus sign or parentheses in the Difference column if the Sell As Is amount exceeds the Process Further amount.) Sell Process As Is Further Difference Less: Net benefit to operating income per batch Decision: Assume Kaine's grocery store is deciding whether to eliminate the salad bar section of its stores. The product line income statement shows the following quarterly data for the salad bar operations: Sales revenue = $860,000 Fixed costs = $95,000 Variable costs = $705,000 1. 2. Only $5,000 of fixed costs can be eliminated if the salad bar is eliminated. The remaining $90,000 of fixed costs are unavoidable. What will happen to Kaine's operating income if it discontinues the salad bars and does nothing with the freed capacity? Management is thinking about replacing the salad bar section of the stores with a specialty olive bar, which is projected to bring in $180,000 of contribution margin each quarter while incurring no additional fixed costs. What will happen to Kaine's operating income if it replaces the salad bars with olive bars? 1. Only $5,000 of fixed costs can be eliminated if the salad bar is eliminated. The remaining $90,000 of fixed costs are unavoidable. What will happen to Kaine's operating income if it discontinues the salad bars and does nothing with the freed capacity? Incremental Analysis for Discontinuation Decision Total Sales revenue from salad bars Contribution margin lost if salad bars are discontinued Operating income lost if salad bars are discontinued 2. Management is thinking about replacing the salad bar section of the stores with a specialty olive bar, which is projected to bring in $180,000 of contribution margin each quarter while incurring no additional fixed costs. What will happen to Kaine's operating income if it replaces the salad bars with olive bars? (Use a minus sign or parentheses for a decrease in operating income.) If Salad Bars Replaced with Olive Bars Contribution margin provided by olive bar Increasel(Decrease) in operating income from replacing salad bars with olive bars