Members of the board of directors of

Safety Systems

have received the following operating income data for the year just ended:

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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.

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Part 1

Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by

$82,000

and decrease fixed marketing and administrative expenses by

$12,000.

Read the requirements

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Part 1

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

Part 2

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
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)

Difference

Part 3

What have you learned from this comparison?

The operating income difference calculated on the total analysis of discontinuing a product line

does not equal

equals

the expected decrease in operating income if

Safety Systems

discontinues the industrial systems product line, as shown in Requirement

1.

This demonstrates that the incremental analysis approach in Requirement 1 yields

different

the same

results as the longer approach in Requirement 2 that compares total operating income under the two alternatives.

Data table B D 4 1 Safety Systems 2 Product Line Contribution Margin Income Statement 3 For the Year Product lines Industrial Household Company 6 Systems Systems Total 7 Sales revenue $ 300,000 $ 320,000 $ 620,000 8 Less cost of goods sold: 9 Variable 40,000 46,000 86,000 10 Fixed 210,000 60,000 270,000 11 Gross profit $ 50,000 $ 214,000 $ 264,000 12 Less marketing and administrative expenses: 13 Variable 67,000 76,0001 143,000 14 Fixed 39,000 21,000 60,000 15 Operating income (loss) (56,000) $ 117,000 $ 61,000 A