On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Childrens Shoes because it reduced income from operations by $10,000.

What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? (Prepare the Differential Analysis before responding to the questions.)

Foremost Footwear Inc.

Product-Line Income Statement

For the Year Ended April 30, 20Y7

1		Childrens Shoes	Mens Shoes	Womens Shoes	Total
2	Sales	$165,000.00	$300,000.00	$500,000.00	$965,000.00
3	Costs of goods sold:
4	Variable costs	$105,000.00	$150,000.00	$220,000.00	$475,000.00
5	Fixed costs	32,000.00	60,000.00	120,000.00	212,000.00
6	Total cost of goods sold	$137,000.00	$210,000.00	$340,000.00	$687,000.00
7	Gross profit	$28,000.00	$90,000.00	$160,000.00	$278,000.00
8	Selling and adminstrative expenses:
9	Variable selling and admin. expenses	$21,000.00	$45,000.00	$95,000.00	$161,000.00
10	Fixed selling and admin. expenses	17,000.00	20,000.00	25,000.00	62,000.00
11	Total selling and admin. expenses	$38,000.00	$65,000.00	$120,000.00	$223,000.00
12	Income (loss) from operations	$(10,000.00)	$25,000.00	$40,000.00	$55,000.00

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Fixed costs
Gain on sale of investments
Income (loss)
Loss on sale of investments
Revenues
Total costs
Variable cost of goods sold
Variable selling and administrative expenses

Differential Analysis

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Prepare a differential analysis to determine the flaw in the general managers decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Score: 63/89

Differential Analysis

Continue (Alternative 1) or Discontinue (Alternative 2) Childrens Shoes

April 30, 20Y7

1		Continue Childrens Shoes	Discontinue Childrens Shoes	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
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Points:

14.87 / 21

Feedback

Check My Work

For continue and discontinue alternatives subtract the costs from the revenue. Separate variable from fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

Questions

Shaded cells have feedback.

What is the flaw in the decision to discontinue Childrens Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?

The general manager is not focusing on the differential revenues and costs.

The general manager has failed to identify the objective of the decision.

The general manager uses only fixed costs to make the decision.

Points:

1 / 1

If the Children Shoes are discontinued, the company'sincome would decrease by.

Points:

3 / 3

Feedback

Check My Work

For continue and discontinue alternatives subtract the costs from the revenue. Separate variable from fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.