40. Product Line Decision. The following monthly segmented income statement is for Hals Hardware.

Management is concerned about the low profit associated with the tools product line and is considering dropping this product line. Allocated fixed costs are assigned to product lines based on floor space used by each product line (measured in square feet), resulting in the following percentages for garden supplies, tools, and paint, respectively: 20 percent, 50 percent, and 30 percent. If the tools product line is eliminated, total allocated fixed costs will be assigned as follows: 62.5 percent to garden supplies, and 37.5 percent to paint. All variable and direct fixed costs for the tools product line will be eliminated.

Production Lines

Garden Supplies Tools Paint Total

Sales Revenue $20,000 $15,000 $23,000 $58,000

Variable costs $11,000 $8,000 9,000 28,000

Contribution 9,000 7,000 14,000 30,000

Direct fixed costs 3,000 1,500 8,500 13,000

Allocated Fixed costs 2,000 5,000 3,000 10,000

Profit 4,000 500 2,500 7,000

Required:

1. Perform differential analysis using the format presented in Figure 4.5 Product Line Differential Analysis for Barbeque Company. Assume keeping all product lines is Alternative 1, and dropping the tools product line is Alternative 2.
2. Which alternative is best? Explain.
3. Summarize the result of dropping the tools product line using the format presented in Figure 4.6 Summary of Differential Analysis for Barbeque Company.
4. Assume the space available from dropping the tools product line can be used by the paint product line, resulting in increased revenues for paint of $12,000 and increased variable costs for paint of $4,000. No additional direct fixed costs would be incurred, and 80 percent of allocated fixed costs would be assigned to paint and 20 percent assigned to garden supplies. Should Hals Hardware drop the tools product line and use the freed-up space to expand the paint product line? (Hint: Prepare a differential analysis using the format presented in Figure 4.5 Product Line Differential Analysis for Barbeque Company to find the answer. Alternative 1 assumes all product lines are kept, and Alternative 2 assumes the tools product line is dropped with a corresponding expansion of the paint product line.)