Differential Analysis for a Discontinued Product

The condensed product$-$line income statement for Northern Lights Company for the month of August is as follows:

Northern Lights Company

Product$-$Line Income Statement

For the Month Ended August $31$

Line Item Description Hats Gloves Socks

Sales $$65,700$ $$88,800$ $$27,500$

Cost of goods sold $(26,900)(33,700)(14,600)$

Gross profit $$38,800$ $$55,100$ $$12,900$

Selling and administrative expenses $(29,900)(34,000)(16,000)$

Operating income $($loss$)$ $$8,900$ $$21,100$ $$(3,100)$

Fixed costs are $17\%$ of the cost of goods sold and $36\%$ of the selling and administrative expenses. Northern Lights Company assumes that fixed costs would not be materially affected if the Socks line were discontinued.

Question Content Area

a$.$ Prepare a differential analysis dated August $31$ to determine if Socks should be continued $($Alternative $1)$ or discontinued $($Alternative $2).$ 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$.2)$ Socks

August $31$

Line Item Description Continue

Socks

$($Alternative $1)$ Discontinue

Socks

$($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$.$ Should the Socks line be retained?