Members of the board of directors of Deluxe Safety have received the following Company accountants estimate that discontinuing the industrial systems line will operating income data for the year just ended: decrease fixed cost of goods sold by $84,000 and decrease fixed marketing and Click the icon to view the operating income data.) administrative expenses by $17,000 Members of the board are surprised that the industrial systems product line is Read the requirements losing money. They commission a study to determine whether the company should discontinue the line Requirement 1. Prepare an incremental analysis to show whether Deluxe Safety should discontinue the industrial systems product line. Incremental Analysis for Discontinuation Decision Total Contribution margin lost if Industrial Systems is discontinued Less: Fixed cost savings if Industrial Systems is discontinued Operating income i Industrial Systems is discontinued Requirement 2. Prepare contribution margin income statements to show Deluxe Safety's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives income numbers to your answer to Requirement 1. What have you learned from this comparison? Begin by preparing the statements with and without the industrial systems line, then prepare the contribution margin income statement showing the decrease if the industrial systems line is discontinued. (Use parentheses or a minus sign for an operating loss.) Deluxe Safety Total Analysis of Discontinuing a Product Line Totals With Totals Without Industrial Systems Industrial Systems Difference Sales revenue Variable expenses Cost of goods sold Marketing and administrative expense Total variable expenses Contribution margin Fixed expenses Cost of goods sold Marketing and administrative expense Total fixed expenses Operating income (1088) What have you learned from this comparison? The operating income difference calculated on the total analysis of discontinuing a product line the expected decrease in operating income if Deluxe Safety discontinues the industrial systems product line, as shown in Requirement 1. This demonstrates that the incremental analysis approach in Requirement 1 yields results as the longer approach in Requirement 2 that compares total operating income under the two alternatives. Data Table 1 2 A B D Deluxe Safety 2 Product Line Contribution Margin Income Statement 3 For the Year Product lines Industrial Household Company 6 Systems Systems Total 7 Sales revenue $ 280,000 $ 310,000 $ 590,000 8 Less cost of goods sold: 9 Variable 31,000 46,000 77,000 10 Fixed 240,000 61,000 301,000 11 Gross profit $ 9,000 $ 203,000 $ 212,000 12 Less marketing and administrative expenses: 13 Variable 67,000 75,000 142,000 14 Fixed 43,000 26,000 69,000 15 Operating income (loss) $ (101,000) $ 102,000 $ 1,000 Print Done i Requirements X 1. Prepare an incremental analysis to show whether Deluxe Safety should discontinue the industrial systems product line. 2. Prepare contribution margin income statements to show Deluxe Safety's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' income numbers to your answer to Requirement 1. What have you learned from this comparison? Print Done the expected decrease The operating income difference calculated on the total analysis of discontinuing a product line Deluxe Safety discontinues the industrial systems product line, as shown in Requirement 1. This demonstrates that the incremental analysis approach in Requirement 1 yields operating Income under the two alternatives. does not equal equals roach in Require results as the longer approach in Require This demonstrates that the incremental analysis approach in Requirement 1 yields operating income under the two alternatives. different the same
