Decision to Discontinue a Product

On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Childrens Shoes because it reduced operating income by $30,000.

Line Item Description	Children's Shoes	Men's Shoes	Women's Shoes	Total
Sales	$280,000	$300,000	$500,000	$1,080,000
Costs of goods sold:
Variable costs	$(135,000)	$(150,000)	$(220,000)	$(505,000)
Fixed costs	(45,000)	(60,000)	(120,000)	(225,000)
Total cost of goods sold	$(180,000)	$(210,000)	$(340,000)	$(730,000)
Gross profit	$100,000	$90,000	$160,000	$350,000
Selling and administrative expenses:
Variable selling and admin. expenses	$(100,000)	$(45,000)	$(95,000)	$(240,000)
Fixed selling and admin. expenses	(30,000)	(20,000)	(25,000)	(75,000)
Total selling and admin. expenses	$(130,000)	$(65,000)	$(120,000)	$(315,000)
Operating income (loss)	$(30,000)	$25,000	$40,000	$35,000

a. Prepare a differential analysis to determine the flaw in the general managers decision. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Line Item Description	Continue Children's Shoes (Alternative 1)	Discontinue Children's Shoes (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$Revenues	$Revenues	$Revenues
Costs:
Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
Variable selling and admin. expenses	Variable selling and admin. expenses	Variable selling and admin. expenses	Variable selling and admin. expenses
Fixed costs	Fixed costs	Fixed costs	Fixed costs
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)

b. What is the flaw in the decision to discontinue Childrens Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?

The general manager is not focusing on the differential revenues and costs. The general manager uses only fixed costs to make the decision. The general manager has failed to identify the objective of the decision.

If the childrens Shoes are discontinued, the company's loss would increase or decrease by $