Making decisions about dropping a productMembers of the board of directors or Security Check have received the following operating income data for the year ended May 31, 2018: Members of my 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 the fixed cost of goods sold by $580,000 and decrease fixed selling and administrative expenses by $12,000.RequirementsPrepare a differential analysis to show whether Security Check should drop the industrial systems product line.Prepare contribution margin income statements to show Security Check’s total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement 1.What have you learned from the comparison in Requirement 2? SECURITY CHECKIncome StatementFor the Year Ended May 31, 2018Product LineIndustrialHouseholdSystomsSystemsTotalNet Sales Revenue$ 360,000$ 380,000$ 740,000Cost of Goods Sold:37,00047,00084,000VariableFoxed260,00063,000323,000Total Cost of Goods Sold297,000110,000407,000Gross Profit63,000270,000333,000Selling and Administrative Expenses:Variable64,00073,000137,000Fixed44,00026,00070,000207,000108,000$ (45,000)99,000$ 171,000Total Selling and Administrative ExpensesOperating Income (Loss)$ 126,000

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Answered: SECURITY CHECK Income Statement For the…

Cornerstones of Financial Accounting

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ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter11: The Statement Of Cash Flows

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Making decisions about dropping a product

Members of the board of directors or Security Check have received the following operating income data for the year ended May 31, 2018:

Members of my 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 the fixed cost of goods sold by $580,000 and decrease fixed selling and administrative expenses by $12,000.

Requirements

Prepare a differential analysis to show whether Security Check should drop the industrial systems product line.
Prepare contribution margin income statements to show Security Check’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.
What have you learned from the comparison in Requirement 2?

SECURITY CHECK
Income Statement
For the Year Ended May 31, 2018
Product Line
Industrial
Household
Systoms
Systems
Total
Net Sales Revenue
$ 360,000
$ 380,000
$ 740,000
Cost of Goods Sold:
37,000
47,000
84,000
Variable
Foxed
260,000
63,000
323,000
Total Cost of Goods Sold
297,000
110,000
407,000
Gross Profit
63,000
270,000
333,000
Selling and Administrative Expenses:
Variable
64,000
73,000
137,000
Fixed
44,000
26,000
70,000
207,000
108,000
$ (45,000)
99,000
$ 171,000
Total Selling and Administrative Expenses
Operating Income (Loss)
$ 126,000

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