Members of the board of directors of Security Systems have received the following operating income data for the year just ended:

Security Systems

Product Line Contribution Margin Income Statement

For the Year

Product lines

Industrial

Household

Company

Systems

Systems

Total

Sales revenue

$320,000

$340,000

$660,000

Less cost of goods sold:

Variable

38,000

45,000

83,000

Fixed

230,000

63,000

293,000

Gross profit

$52,000

$232,000

$284,000

Less marketing and administrative expenses:

Variable

63,000

72,000

135,000

Fixed

42,000

26,000

68,000

Operating income (loss)

$(53,000)

$134,000

$81,000

(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 systems line will decrease fixed cost of goods sold by $86,000 and decrease fixed marketing and administrative expenses by $12,000.

1.	Prepare an incremental analysis to show whether Security Systems should discontinue the industrial systems product line.
2.	Prepare contribution margin income statements to show Security 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?