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.

Hawkeye Shoes Inc. Product-Line Income Statement For the Year Ended November 30, 20Y8

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

Question Content Area

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.

Differential Analysis Continue (Alt. 1) or Discontinue (Alt. 2) Childrens Shoes November 30

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)

Question Content Area

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

increasedecrease

by fill in the blank 1 of 1$.