Members of the board of directors of Security Team 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 systems ine will decrease fixed cost of goods sold by $82,000 and decrease fixed marketing and administrative expenses by $13,000. Read the requirements Requirement 1. Prepare an incremental analysis to show whether Security Team should discontinue the industrial systems product line. Incremental Analysis for Discontinuation Decision Total Contribution margin lost i Industrial Systems is discontinued Less: Fixed cost savings i Industrial Systems is discontinued Operating income if Industrial Systems is discontinued Requirement 2. Prepare contribution margin income statements to show Security Team'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 syurdims line, then prepare the contrbution margin income statement showing the decrease it the Industrial systems line is discontinued. (Use parentheses or a minus sign for an operating loss.) Security Team Total Analysis of Discontinuing a Product Line Totals With Totals Without Industrial Systems Industrial Systems Difference Sales revenue Variable expenses Cost of goods sold Members of the board of directors of Security Team have received the following operating income data Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of for the year just ended: goods sold by $82,000 and decrease fixed marketing and administrative expenses by $13,000 Click the icon to view the operating income data) Read the requirements 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 Industrial Systems Industrial Systems Difference 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 Totalfixed 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 il Security Team discontinues the industrial systems product line, as shown in Requirement 1. This demonstrates that the incremental analysis approach in Requirement 1 yields results as the longer approach in Requirement that compares total operating income under the two alternatives i Data Table Security Team Product Line Contribution Margin Income Statement For the Year Product lines Industrial Household Company Systems Systems Total 300,000 $ 370,000 $ 670,000 Sales revenue $ Less cost of goods sold: Variable 39,000 250,000 46,000 63,000 85,000 313,000 Fixed $ 11,000 $ 261,000 $ 272,000 Gross profit Less marketing and administrative expenses: Variable 63,000 45,000 68,000 26,000 Fixed 131,000 71,000 70,000 $ (97,000) $ 167,000 $ Operating income (loss)
