Differential Analysis for a Discontinued Product

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

Line Item Description	Hats	Gloves	Socks
Sales	$65,300	$89,800	$27,400
Cost of goods sold	(25,500)	(33,700)	(14,500)
Gross profit	$39,800	$56,100	$12,900
Selling and administrative expenses	(29,000)	(34,100)	(15,300)
Operating income (loss)	$10,800	$22,000	$(2,400)

Fixed costs are 12% of the cost of goods sold and 39% 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.

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)