Product Line Decision. The following segmented annual income statement is for Hathaway Manufacturing, Inc.

Management is concerned about the significant losses associated with the computers product line and would like to drop this product line. Allocated fixed costs are assigned to product lines based on sales. If the computers product line is eliminated, total allocated fixed costs are assigned to the remaining product lines, and all variable and direct fixed costs for the computers product line 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 the computers product line is Alternative 2.

2. Which alternative is best? Explain.

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

4. Explain what happened to the profitability of the furniture product line as a result of dropping the computers product line.

Product Lines osts Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) Computers $1,125,000 480,000 $ 645,000 650,000 112,500 $ (117,500) Furniture $1,500,000 825,000 $ 675,000 480,000 150,000 $ 45,000 Supplies $375,000 150,000 $225,000 105,000 37,500 $ 82,500 Total $3,000,000 1,455,000 $1,545,000 1,235,000 300,000 $ 10,000 Product Lines osts Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) Computers $1,125,000 480,000 $ 645,000 650,000 112,500 $ (117,500) Furniture $1,500,000 825,000 $ 675,000 480,000 150,000 $ 45,000 Supplies $375,000 150,000 $225,000 105,000 37,500 $ 82,500 Total $3,000,000 1,455,000 $1,545,000 1,235,000 300,000 $ 10,000