chapter 8

P8-50A Prepare and use the contribution margin statements for discontinuing a line decision ( Learning Objective 4) Members of the board of directors of Security Alliance have received the following operating income data for the year just ended: Security Alliance Product Line Contribution Margin Income Statement For the Year Product Lines Industrial Household Company Systems $ 310,000 380,000 690,000 Systems Total Sales revenue Less cost of goods sold: Variable Fixed Gross profit Less marketing and administrative expenses: Variable Fixed Opertating income (loss) 32,000 280,000 (2,000) 268,000 266,000 46,000 66,000 78,000 346,000 69,000 23,000 $ (102,000) $ 176,000 132,000 60,000 37,000 74,000 Members of the board are surprised that the industrial systems product line is losing money. They commision a study to determine whether the company should discontinue the line. Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $80,000 and decrease fixed marketing and administrative expenses by $11,000. Requirements: 1. Prepare and incremental analysis to show whether Security Alliance should discontinue the industrial system product line. 2. Prepare contribution margin income statements to show Security Alliance's total operating income under the two alternatives: (a) witht the industrila systems line and (b) without the line. Comapare the difference between the two alternatives' income numbers to your answer to Requirement 1 What have you learned from this comparison