Members of the board of directors of

Control One

have received the following profit data for the year ended

31 May 2016:

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(Click the icon to view the profit data.)

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine

whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of sales by

$82 000

and decrease fixed marketing and administrative expenses by

$15 000.

Requirements

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Requirement 1. Prepare an incremental analysis to show whether

Control One

should drop the industrial systems product line. (Use a minus sign or brackets for negative numbers.)

Control One
Incremental analysis of dropping a product line
	Expected decrease in revenues
	Dropping industrial systems sales
	Expected decrease in expenses:
	Variable expenses:
	Cost of sales
	Marketing and administrative expenses
	Fixed expenses:
	Cost of sales
	Marketing and administrative expenses
	Expected decrease in total expenses
		in profit

Requirement 2. Prepare contribution margin income statements to show

Control One's

total profit under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' profit/loss numbers to your answer to requirement 1. (Use brackets or a minus sign for an operating loss.)

Control One
Total analysis of dropping a product line
			Change if
	Totals with	Totals without	industrial systems
	industrial systems	industrial systems	is dropped
Sales revenue
Variable expenses:
Cost of sales
Marketing and administrative expense
Total variable expenses
Contribution margin
Fixed expenses:
Cost of sales
Marketing and administrative expense
Total fixed expenses
Profit (loss)

Requirement 3. What have you learned from the comparison in requirement 2?

The profit difference calculated on the total analysis of dropping a product line

does not equal

equals

the expected decrease in profit if

Control One

drops the industrial systems product line, as shown in

requirement

1.

This demonstrates that the incremental analysis approach in

requirement

1 yields

different

the same

result as the longer approach in requirement 2 that compares total profit under the two alternatives.