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

Hats Gloves Socks

Sales $65,900 $90,100 $27,300

Cost of goods sold (27,200) (33,700) (15,100)

Gross profit $38,700 $56,400 $12,200

Selling and administrative expenses (29,900) (34,600) (15,500)

Operating income (loss) $8,800 $21,800 $(3,300)

Fixed costs are 17% of the cost of goods sold and 40% of the selling and administrative expenses. Northern Lights Company assumes that fixed costs would not be materially affected if the Socks line were discontinued.

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 $ ________ $ ________ $ ________

Costs:

Variable cost of goods sold ________ _________ __________

Variable selling and admin. expenses ________ _________ __________

Fixed costs ________ _________ __________

Profit (Loss) $ ________ $ ________ $ ________