P25-35B Members of the board of directors of Solid Security, Inc., have received the following operating income data for the year just ended. Product Line Home Business Systems Systems $300,000 $310,000 Total $610,000 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 ancome (loss) $ 38,000 210,000 248,000 52,000 $ 42,000 69,000 111,000 199,000 $ 80,000 229,000 359,000 251,000 66,000 40,000 106,000 - S (54,000) 71,000 22.000 93,000 1 $106,000 137,000 62,000 199,000 $2,000 Members of the board are surprised that the Home Systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping Home Systems will decrease the fixed cost of goods sold (fixed manufacturing expenses) by $80,000 and decrease the fixed marketing and administrative expenses by $14,000. Requirements 1. Prepare an incremental analysis to calculate the change in operating income if the Home Systems product line is dropped. Should Solid Security drop the Home Systems product line? (p. 1258) 2. Prepare contribution margin income statements to show Solid Security's total operating income under the two alternatives: (a) with the Home 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 compari- son? (p. 1256) Special Decisions and Capital Budgeting 1291