11.2.4

On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Childrens Shoes because it reduced operating income by $30,000.

Hawkeye Shoes Inc. Product-Line Income Statement For the Year Ended November 30, 20Y8
	Children's Shoes			Men's Shoes			Women's Shoes			Total
Sales		$280,000			$300,000			$500,000		$1,080,000
Costs of goods sold:
Variable costs	$(135,000)	$(150,000)	$(220,000)	$(505,000)
Fixed costs	(45,000)	(60,000)	(120,000)	(225,000)
Total cost of goods sold	$(180,000)	$(210,000)	$(340,000)	$(730,000)
Gross profit	$100,000	$90,000	$160,000	$350,000
Selling and administrative expenses:
Variable selling and admin. expenses	$(100,000)	$(45,000)	$(95,000)	$(240,000)
Fixed selling and admin. expenses	(30,000)	(20,000)	(25,000)	(75,000)
Total selling and admin. expenses	$(130,000)	$(65,000)	$(120,000)	$(315,000)
Operating income (loss)	$(30,000)	$25,000	$40,000	$35,000

a. Prepare a differential analysis to determine the flaw in the general managers decision. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Childrens Shoes
November 30
	Continue Children's Shoes (Alternative 1)	Discontinue Children's Shoes (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$____	$___	$___
Costs:
Variable cost of goods sold	___	____	___
Variable selling and admin. expenses	___	___	____
Fixed costs	___	___	____
Profit (Loss)	$___	$___	$___

If the childrens Shoes are discontinued, the company's loss would increase by $___

A company is considering replacing an old piece of machinery, which cost $602,100 and has $351,300 of accumulated depreciation to date, with a new machine that has a purchase price of $486,200. The old machine could be sold for $63,600. The annual variable production costs associated with the old machine are estimated to be $156,300 per year for eight years. The annual variable production costs for the new machine are estimated to be $98,600 per year for eight years.

a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$___	$____	$___
Costs:
Purchase price	____	____	____
Variable productions costs (8 years)	___	____	___
Profit (Loss)	$____	$___	____

What is the sunk cost in this situation?

The sunk cost is $____