SAFE ZONE Income Statement For the Year Ended May 31, 2012 Product Line Industrial Household Systems Systems Total Sales revenue $ 370,000 $ 390,000 $760,000 Cost of goods sold: Variable 36,000 42,000 78,000 Fixed 260,000 65.000 325,000 Total cost of goods sold $ 296,000 $ 107.000 $ 403,000 Gross profit $ 74,000 $ 283,000 $ 357,000 Marketing and administrative expense Variable 66,000 75,000 141,000 Fixed 44,000 24,000 68.000 Total marketing and administrative exp $ 110.000 $ 99.000 $ 209,000 Operating Income (loss) $ (36.000 184,000 S 148.000 Members of the board are surprised that the industrial systems product line is losing money. 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 marketing and administrative expenses by $14,000 P20-23A Req. 1 Security Force Incremental Analysis of Dropping a Product Line Expected decrease in revenues - Dropping industrial system sales Expected decrease in expenses Variable expenses Cost of goods sold Marketing and administrative expenses Fixed expenses: Cost of goods sold 84,000 Marketing and administrative expenses 14,000 Expected decrease in total expenses Expected decrease in operating income $ $ 98,000 98,000 Decision? Req. 2 1 Safe Zone Total Analysis of Dropping a Product Line Totals with Industrial Systems 760,000 13 Decrease if Industrial Systems is Dropped Totals without Industrial Systems 74 $ 15 76 77 78,000 141,000 219.000 541,000 778 Sales revenue Variable expenses: Cost of goods sold Marketing and administrative exp. Total variable expenses Contribution margin Fixed expenses: Cost of goods sold Marketing and administrative exp. Total fixed expenses Operating income (loss) 79 S 80 81 325,000 68,000 82 83 393000 84 S 148000 85