Members of the board of directors of

Security AlarmsSecurity Alarms

have received the following operating income data for the year ended May 31, 2016 :

Security Alarms

Income Statement

For the Year Ended May 31, 2016

		Product Line
		Industrial	Household
		Systems	Systems	Total
	Sales Revenue	$300,000	$390,000	$690,000
	Cost of Goods Sold:
	Variable	33,000	43,000	76,000
	Fixed	260,000	66,000	326,000
	Total Cost of Goods Sold	293,000	109,000	402,000
	Gross Profit	7,000	281,000	288,000
	Selling and Administrative Expenses:
	Variable	62,000	75,000	137,000
	Fixed	43,000	26,000	69,000
	Total Selling and Administrative Expenses	105,000	101,000	206,000
	Operating Income (Loss)	$(98,000)	$180,000	$82,000

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 $81,000 and decrease fixed selling and administrative expenses by $12,000

.

Prepare a differential analysis to show whether

Security Alarms

should drop the industrial systems product line.

2.

Prepare contribution margin income statements to show

Security Alarm'sSecurity Alarm'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 2?

requien 1 :

Expected decrease in revenues

Expected decrease in total variable costs

Expected decrease in fixed costs

Expected decrease in total costs

Expected decrease

in operating income

Requirement 1. Prepare a differential analysis to show whether

Security AlarmsSecurity Alarms

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		$95,000
	Expected decrease in fixed costs		93,000
	Expected decrease in total costs			188,000
	Expected decrease	in operating income		$(112,000)

Requirement 2. Prepare contribution margin income statements to show

Security Alarm'sSecurity Alarm'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.)

Security Alarms
Contribution Margin Income Statement
For the Year Ended May 31, 2016
	Totals With	Totals Without	Change if Industrial
	Industrial Systems	Industrial Systems	Systems Is Dropped
Sales Revenue
Variable Costs:
Cost of Goods Sold
Selling and Administrative Expenses
Total Variable Costs
Contribution Margin
Fixed Costs:
Cost of Goods Sold
Selling and Administrative Expenses
Total Fixed Costs
Operating Income (Loss)

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