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 $14,000. 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 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.) Adobe Security Data table Total Analysis of Discontinuing a Product Line A B D Totals With Totals Without Industrial Systems Industrial Systems Difference 1 Adobe Security 2 Sales revenue Product Line Contribution Margin Income Statement For the Year 3 Variable expenses: Cost of goods sold 4 Product lines Industrial Household Systems Systems Marketing and administrative expense Company Total 6 Total variable expenses 7 Sales revenue $ 280,000 $ 320,000 $ 600,000 Contribution margin 8 Less cost of goods sold: 9 Variable 39,000 39,000 78,000 Fixed expenses Cost of goods sold 10 Fixed 230,000 60.000 290,000 Marketing and administrative expense 11 Gross profit $ 11.000 $ 221,000 $ 232,000 Total fixed expenses 12 Less marketing and administrative expenses: 13 Variable Operating income (loss) 60,000 74,000 134,000 14 Fixed 44,000 27,000 71,000 What have you learned from this comparison? 15 Operating income (loss) $ (93,000) $ 120,000 $ 27,000 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. This demonstrates that the incremental analysis approach in Requirement 1 yields results as the longer approach in Requirement 2 that compares total operating income under the two alternatives. Print Done