41. Product Line Decision and Qualitative Factors. The following annual segmented income statement is for Wax, Inc., a maker of wax for cars, boats, and floors.

Management is concerned about the loss associated with the floors product line and is considering dropping this product line. Allocated fixed costs are assigned to product lines based on direct labor hours associated with each product line, resulting in the following percentages for cars, boats, and floors, respectively: 30 percent, 25 percent, and 45 percent. If the floors product line is eliminated, total allocated fixed costs will be assigned to the remaining products as follows: 55 percent to cars, and 45 percent to boats. All variable and direct fixed costs for the floors product line will be eliminated.

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 floors product line is Alternative 2.
2. Which alternative is best? Explain.
3. Summarize the result of dropping the floors 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 floors product line can be used by the boats product line, resulting in increased revenues for boats of $200,000 and increased variable costs for boats of $110,000. An additional $10,000 in direct fixed costs would be incurred for the boats product line. Allocated fixed costs would be assigned as follows: 40 percent to cars, and 60 percent to boats. Should Wax, Inc., drop the floors product line and use the freed-up space to expand the boats product line? (Hint: Prepare a differential analysis using the format presented in Figure 4.6 Product Line Differential Analysis for Barbeque Company to find the answer. Alternative 1 assumes all product lines are kept, and Alternative 2 assumes the floors product line is dropped with a corresponding expansion of the boats product line.)
5. Identify at least one qualitative factor that should be considered before management decides to drop a product line.