Members of the board of directors of Security Alliance have received the following operating income data for the year just ended: 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 the industrial system decrease fixed cost of goods sold by $80,000 and decrease fixed mark administrative expenses by $11,000. Read the requirements Data lable 4 B D 1 Security Alliance 2 Product Line Contribution Margin Income Statement 3 For the Year 4 Product lines Industrial Household Company 6 Systems Systems Total 7 Sales revenue $ 310,000 $ 380,000 $ 690,000 8 Less cost of goods sold: 9 Variable 32,000 46,000 78,000 10 Fixed 280,000 66,000 346,000 11 Gross profit $ (2,000 $ 268,000 $ 266,000 12 Less marketing and administrative expenses: 13 Variable 63,000 69,000 132,000 14 Fixed 37,000 23,000 60,000 15 Operating income (loss) $ (102,000) $ 176,000 $ 74,000 Print Done X Requirements 1. Prepare an incremental analysis to show whether Security Alliance should discontinue the industrial systems product line. 2. Prepare contribution margin income statements to show Security Alliance'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. What have you learned from this comparison? Print Done Total Requirement 1. Prepare an incremental analysis to show whether Security Alliance should discontinue the industrial systems product line. Incremental Analysis for Discontinuation Decision Contribution margin lost if Industrial Systems is discontinued Less: Fixed cost savings if Industrial Systems is discontinued Operating income Jif Industrial Systems is discontinued Requirement 2. Prepare contribution margin income statements to show Security Alliance'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. What have you learned from this comparison? Begin by preparing the statements with and without the industrial systems tine, 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.) Security Alliance Total Analysis of Discontinuing a Product Line Difference 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) What have you learned from this comparison? The operating income difference calculated on the total analysis of discontinuing a product line the expected decrease in operating Income if Security Alliance discontinues the industrial systems product line, as shown in Requirement 1 This demonstrates that the incremental analysis approach in Requirement 7 yields results as the longer approach in Requirement 2 that compares total operating income under the two alternatives
