Members of the board of directors of Safety Systems have received the following operating income data for the year just Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by ended: $86,000 and decrease fixed marketing and administrative expenses by $16,000. E: (Click the icon to view the operating income data.) Read the requirements. 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 discontinue the line. Requirement 1. Prepare an incremental analysis to show whether Safety Systems 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 if Industrial Systems is discontinued Requirement 2. Prepare contribution margin income statements to show Safety Systems' 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.) Safety Systems Total Analysis of Discontinuing a Product Line Totals With Totals Without Industrial Systems Industrial Systems Difference Totals Without Totals With 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 (loss) What have you learned from this comparison? i Data Table Safety Systems Product Line Contribution Margin Income Statement For the Year Product lines Industrial Household Company Systems Systems Total $ 350,000 $ 370,000 $ 720,000 Sales revenue Less cost of goods sold: Variable 35,000 260,000 40,000 69,000 75,000 329,000 Fixed $ 55,000 $ 261,000 $ 316,000 Gross profit Less marketing and administrative expenses: Variable 61,000 44,000 (50,000) $ 71,000 29,000 132,000 73,000 Fixed $ 161,000 $ 111,000 Operating income (loss) Print Print Done Done] the expected decrease in operating income if Safety Systems discontinues the industrial systems product line, as shown in The operating income difference calculated on the total analysis of discontinuing a product line Requirement 1. This demonstrates that the incremental analysis approach in Requirement 1 yields V results as the longer approach in Requirement 2 that compares total operating income under the two alternatives
