Members of the board of directors of

Safety SystemsSafety Systems

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

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(Click the icon to view the operating income data.)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. Company accountants estimate that discontinuing industrial systems will decrease fixed cost of goods sold by

$ 86 comma 000$86,000

and decrease fixed marketing and administrative expenses by

$ 11 comma 000$11,000.

Requirements

1.

Prepare an incremental analysis to show whether

Safety SystemsSafety Systems

should discontinue the industrial systems product line.

2.

Prepare contribution margin income statements to show

Safety Systems'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 twoalternatives' income numbers to your answer to Requirement 1. What have you learned from this comparison?

Safety Systems

Product Line Income Statement

For the Year

Product lines

Industrial

Household

Company

Systems

Systems

Total

Sales revenue

$300,000

$340,000

$640,000

Less cost of goods sold:

Variable

35,000

43,000

78,000

Fixed

270,000

67,000

337,000

Gross profit

$(5,000)

$230,000

$225,000

Less marketing and administrative expenses:

Variable

66,000

68,000

134,000

Fixed

45,000

20,000

65,000

Operating income (loss)

$(116,000)

$142,000

$26,000

Requirement 1. Prepare an incremental analysis to show whether

Safety SystemsSafety 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'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

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 SystemsSafety 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.

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