Product Line Decision. The following monthly segmented income statement is for South Side LLC.

Management is concerned about the losses associated with product line A and is considering dropping this product line. Allocated fixed costs are assigned to product lines based on sales. If product line A is eliminated, total allocated fixed costs are assigned to the remaining product lines, and all variable and direct fixed costs for product line A will be eliminated.

Required:

1. Perform differential analysis using the format presented in Figure 7.6. Assume keeping all product lines is Alternative 1, and dropping product line A is Alternative 2. Figure 7.6

2. Which alternative is best? Explain.

3. Summarize the result of dropping product line A using the format presented in Figure 7.7.Figure 7.7

4. Explain why the loss shown for product line A in the segmented income statement might be misleading to management.

Product Lines B Total Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) $37,500 16,000 $21,500 19,500 3.750 $(1.750) $50,000 27,500 $ 22,500 16,000 5,000 $1,500 $12,500 5,000 $ 7,500 3,500 1,250 $ 2,750 $100,000 48,500 $ 51,500 39,000 10,000 $ 2,500 Panel A: Alternative kep all product lines) Charcoal Barbecues 590.000 Sales revenge Variable costs Contribution margin Directed costs Allocated fred costs Profits Gas Barbecues $450,000 110,000 5340.000 64.000 song $190,000 30.000 40.000 18.000 58.000 Barbecue Accessories S000 15.000 $45.000 1000 17000 517000 Total 5600,000 165,000 5435,000 110,000 120,000 $199.000 Panel B: Alternative 2 drop the charcoal barbecues linel Gas Barbecues 5450,000 Sales revenue Variable costi Contribution margin Directed costs Allocated red costs Profit Barbecue Accessories 560,000 15.000 545.000 16.000 141189 $340,000 60.000 10582 SIZAL Total $510,000 325.000 $385.000 76,000 120,000 $189.000 Panel C. Differential Analysis Sales revenue Variable costs Contribution margin Directed cost Allocated fixed costs Profit Alternative Total keep all product lines panel Al 5600,000 165.000 5415.000 116.000 120,000 Alternative 2 Total Idrop charcoal barbecues panel) $10.000 125.000 $185.000 76.000 120.000 S19.000 Differential Amount S90.000 40000 S60000 40,000 D Alternative Higher Higher Higher Higher Result of Dropping Charcoal Barbecues Sales revenue lost Variable costs eliminated Contribution margin eliminated Direct fixed costs eliminated Loss from dropping product line $(90,000) 40,000 $(50,000) 40,000 $(10,000)