Members of the board of directors of Safe Zone have received the following operating income data for the year ended May 31, 2012: SAFE ZONE Income Statement For the Year Ended May 31, 2012 Product Line Industrial Household Systems Systems Total Sales revenue $ 370,000 $ 390,000 $760,000 Cost of goods sold: Variable 36,000 42,000 78,000 Fixed 260.000 65.000 325,000 Total cost of goods sold S 296.000 107.000 $403,000 Gross profit $ 74,000 $ 283,000 $ 357,000 Marketing and administrative expense Variable 66,000 75,000 141,000 Fixed 44000 24.000 68.000 Total marketing and administrative exp 110.000 S 99.000 $ 209,000 Operating income (loss) S 136.000 184.000 $ 148.000 B 10 32 Members of the board are surprised that the industrial systems product line is losing 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 goods sold by $84,000 and decrease fixed marketing and administrative expenses by $14,000. Requirements 1. Prepare an incremental analysis to show whether Safe Zone should drop the industrial systems product line. 2. Prepare contribution margin income statements to show Safe Zone'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. 3. What have you learned from the comparison in Requirement 22 Test Your Knowledge P20-23A Req. 1 Security Force Incremental Analysis of Dropping a Product Line Expected decrease in revenues - Dropping industrial system sales Expected decrease in expenses - Variable expenses Cost of goods sold Marketing and administrative expenses Fixed expenses: Cost of goods sold 84,000 Marketing and administrative expenses 14,000 Expected decrease in total expenses Expected decrease in operating income $ 50 98,000 98,000 60 be Decision? Req. 2 Safe Zone Total Analysis of Dropping a Product Line Totals with Industrial Systems 760,000 Totals without Industrial Systems Decrease if Industrial Systems Is Dropped $ 78,000 141,000 Sales revenue Variable expenses: Cost of goods sold Marketing and administrative exp. Total variable expenses Contribution margin Fixed expenses: Cost of goods sold Marketing and administrative exp. Total fixed expenses Operating income (loss) 219.000 541,000 $ 325 000 68,000 393,000 148.000