Members of the board of directors of Security Force have received the following operating income data for the year just ended: i (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 drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $83,000 and decrease fixed marketing and administrative expenses by $17,000. ( Requirement 1. Prepare an incremental analysis to show whether Security Force should drop the industrial systems product line. Security Force Incremental Analysis of Dropping a Product Line Expected decrease in revenues: Dropping industrial systems sales Expected decrease in expenses: Variable expenses: Cost of goods sold Marketing and administrative expenses Cost of goods sold Marketing and administrative expenses Expected decrease in total expenses Expected decrease in operating income Fixed expenses: Requirements 1. 2. Prepare an incremental analysis to show whether Security Force should drop the industrial systems product line. Prepare contribution margin income statements to show Security Force'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? Requirement 2. Prepare contribution margin income statements to show Security Force'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 line, then prepare the contribution margin income statement showing the decrease if the industrial systems line is dropped. (Use parentheses or a minus sign for an operating loss.) Security Force Total Analysis of Dropping a Product Line Totals With Industrial Systems Decrease If Industrial Systems Is Dropped Sales revenue Variable expenses: Time Remaining: 02:46:40 Next Cost of goods sold Marketing and administrative expense Total variable expenses Contribution margin Fixed expenses: Cost of goods sold Marketing and administrative expense Totals Without Industrial Systems 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 dropping a product line This demonstrates that the incremental analysis approach in Requirement 1 yields the expected decrease in operating income if Security Force drops the industrial systems product line, as shown in Requirement 1. results as the longer approach in Requirement 2 that compares total operating income under the two alternatives. More info Sales revenue... Cost of goods sold: Variable Fixed Total cost of goods sold Gross profit ..... Marketing and administrative expenses: Variable Fixed Total marketing and administrative expenses Operating income (loss). . . . Print $ $ Product Line Industrial Household Systems Systems 310,000 $ 39,000 $ 290,000 329,000 (19,000) 65,000 44,000 109,000 $ (128,000) $ Done - Total 380,000 $ 690,000 50,000 $ 89,000 66,000 356,000 116,000 445,000 264,000 245,000 73,000 138,000 28,000 72,000 101,000 210,000 163,000 $ 35,000 X
