Product Line Decision. The following monthly segmented income statement is for Durango Company.

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:

Perform differential analysis using the format presented in Figure 7.6 "Product Line Differential Analysis for Barbeque Company". Assume keeping all product lines is Alternative 1, and dropping product line A is Alternative 2.

Which alternative is best? Explain.

Summarize the result of dropping product line A using the format presented in Figure 7.7 "Summary of Differential Analysis for Barbeque Company".

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

Product Lines 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