QUESTION (#6): OPERATING INCOME DATA: REQUIREMENTS: REQUIREMENT 1: REQUIREMENT 2: REQUIREMENT 3:

Members of the board of directors of Security One have received the following operating income data for the year ended May 31, 2018: (Click the icon to view the operating income data.) Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $84,000 and decrease fixed selling and administrative expenses by $11,000. Read the requirements. Security One Income Statement For the Year Ended May 31, 2018 Product Line Industrial Household Systems Systems Total $ 330,000 $ 370,000 $ 700,000 Net Sales Revenue Cost of Goods Sold: Variable 36,000 250,000 44,000 66,000 80,000 316,000 286,000 110,000 396,000 Fixed Total Cost of Goods Sold Gross Profit Selling and Administrative Expenses: 44,000 260,000 304,000 Variable Fixed 66,000 38,000 104,000 (60,000) $ 76,000 29,000 105,000 155,000 $ 142,000 67,000 209,000 95,000 Total Selling and Administrative Expenses $ Operating Income (Loss) 1. Prepare a differential analysis to show whether Security One should drop the industrial systems product line. 2. Prepare contribution margin income statements to show Security One's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' income numbers to your answer to Requirement 1. 3. What have you learned from the comparison in Requirement 2? Requirement 1. Prepare a differential analysis to show whether Security One should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.) in operating income Requirement 2. Prepare contribution margin income statements to show Security One's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' income numbers to your answer to Requirement 1. (Use parentheses or a minus sign for an operating loss.) Security One Contribution Margin Income Statement For the Year Ended May 31, 2018 Totals With Totals Without Industrial Systems Industrial Systems Change if Industrial Systems Is Dropped Net Sales Revenue Variable Costs: Manufacturing Selling and Administrative Total Variable Costs Contribution Margin Fixed Costs: Manufacturing Selling and Administrative Total Fixed Costs Operating Income (Loss)