Adobe Security Product Line Contribution Margin Income Statement For the Year Product lines Industrial Household Company Systems Systems Total Sales revenue $ 300,000 $ 310,000 $ 610,000 Less cost of goods sold: Variable 40,000 45,000 85,000 Fixed 220,000 61,000 281,000 Gross profit $ 40,000 $ 204,000 $ 244,000 Less marketing and administrative expenses: Variable 68,000 74,000 142,000 Fixed 36,000 22,000 58,000 $ (64,000) $ 108,000 $ 44,000 Operating income (loss) Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $85,000 and decrease fixed marketing and administrative expenses by $9,000. Members of the board of directors of Adobe Security 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 Adobe Security 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 Adobe Security'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.) Requirement 2. Prepare contribution margin income statements to show Adobe Security'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.) Adobe Security 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 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 operating income difference calculated on the total analysis of discontinuing a product line the expected decrease in operating income if Adobe Security discontinues the industrial systems product line, as shown in Requirement 1. results as the longer approach in Requirement This demonstrates that the incremental analysis approach in Requirement 1 yields 2 that compares total operating income under the two alternatives
