A B D 1 Security Force 2 Product Line Contribution Margin Income Statement 3 For the Year 4 Product lines Industrial Household Systems Systems Company Total 6 7 Sales revenue $ 280,000 $ 320,000 $ 600,000 8 Less cost of goods sold: 9 Variable 38,000 41,000 79,000 10 Fixed 240,000 68,000 308,000 11 Gross profit $ 2,000 $ 211,000 $ 213,000 12 Less marketing and administrative expenses: 13 Variable 64,000 70,000 134,000 14 Fixed 42,000 25,000 67,000 15 Operating income (loss) $ (104,000) $ 116,000 $ 12,000 Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $78,000 and decrease fixed marketing and administrative expenses by $8,000. 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. Read the requirements. Requirement 1. Prepare an incremental analysis to show whether Security Force should discontinue the industrial systems product line. 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 Totals With Totals Without Industrial Systems Industrial Systems Difference Sales revenue Variable expenses: Cost of goods sold Marketing and administrative expense Total variable expenses Contribution margin Fixed expenses: Cost of goods sold Marketing and administrative expense Total fixed expenses Operating income (loss) What have you learned from this comparison? the expected decrease in The operating income difference calculated on the total analysis of discontinuing a product line operating income if Security Force discontinues the industrial systems product line, as shown in Requirement 1. results as the longer approach in Requirement 2 This demonstrates that the incremental analysis approach in Requirement 1 yields that compares total operating income under the two alternatives