Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $84,000 and decrease fixed marketing and administrative expenses by $15,000 Members of the board of directors of Security Systems 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. CIN Data table Syst Requirements A B 1 Security Systems Product Line Contribution Margin Income Statement 2 1. Prepare an incremental analysis to show whether Security Systems should discontinue the industrial systems product line. 2. Prepare contribution margin income statements to show Security Systems' 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? 3 For the Year Jer between the two alternatives' 4 Product lines Industrial Household Company Systems Systems Total $ 350,000 $ 370,000 $ 720,000 tom hinus sign for an operating 6 7 Sales revenue Print Done 8 Less cost of goods sold: 9 Variable 39,000 39,000 78,000 10 Fixed 260,000 65,000 325,000 S 51,000 $ 266,000 $ 317,000 11 Gross profit 12 Less marketing and administrative expenses: 13 Variable 68,000 77,000 145,000 14 Fixed 41,000 20,000 61,000 15 Operating income (loss) (58,000) 169,000 $ 111,000 Next Requirement 1. Prepare an incremental analysis to show whether Security Systems should discontinue the industrial systems product line. Total Incremental Analysis for Discontinuation Decision 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 Systems' 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 Systems 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 Members of the board of directors of Security Systems have received the following operating income data for the year just Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by 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 operating income difference calculated on the total analysis of discontinuing a product line the expected decrease in operating income if Security Systems discontinues the industrial systems product line, as shown in Requirement 1. This demonstrates that the incremental analysis approach in Requirement 1 yields V results as the longer approach in Requirement 2 that compares total operating income under the two alternatives
