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Members of the board of directors of Safety Step have received the following operating income data for the year ended May 31, 2018: (Click the
Members of the board of directors of Safety Step have received the following operating income data for the year ended May 31, 2018: (Click the icon to view the operating income data.) Members of the board are surprised that the industrial systems product line is not profitable. 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 $82,000 and decrease fixed selling and administrative expenses by $10,000. Read the requirements Requirement 1. Prepare a differential analysis to show whether Safety Step should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.) Expected decrease in revenues $ (300,000) Expected decrease in total variable costs $ 108,000 Expected decrease in fixed costs 92,000 200,000 Expected decrease in total costs $ (100,000) Expected decrease in operating income Requirement 2. Prepare contribution margin income statements to show Safety Step'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. (Use parentheses or a minus sign for an operating loss.) Safety Step Contribution Margin Income Statement For the Year Ended May 31, 2018 Totals With Totals Without Change if Industrial Industrial Systems Industrial Systems Systems Is Dropped Net Sales Revenue Variable Costs: Manufacturing Selling and Administrative Total Variable Costs Contribution Margin Fixed Costs: Manufacturing Selling and Administrative Total Fixed Costs Operating Income (Loss) Safety Step Income Statement For the Year Ended May 31, 2018 Product Line Industrial Household Systems Systems Total Net Sales Revenue $ 300,000 $ 370,000 $ 670,000 Cost of Goods Sold: Variable 39,000 49,000 88,000 Fixed 250,000 62,000 312,000 Total Cost of Goods Sold 289,000 111,000 400,000 Gross Profit 11,000 259,000 270,000 Selling and Administrative Expenses: Variable 69,000 76,000 145,000 Fixed 39,000 24,000 63,000 Total Selling and Administrative Expenses 108,000 100,000 208,000 Operating Income (Loss) $ 197,000) $ 159,000 $ 62,000
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