Question

Product J is one of the many products manufactured and sold by Gooble Company. An income statement by product line for the past year indicated a net loss for Product J of $7,250. This net loss resulted from sales of $265,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. However, because of the net loss, management is considering the elimination of the unprofitable endeavor. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued.

Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J.

Gooble Company
Proposal to Discontinue Product J
February 8, 20XX
Differential revenue from annual sales of product:
Revenue from sales		$___________
Differential cost of annual sales of product:
Variable cost of goods sold	$	__________
Variable operating expenses		__________ and _____________
Annual differential income from sales of Product J		$_________________

Answer 1

Gooble Company
Proposal to Discontinue Product J
February 8, 20XX
Differential revenue from annual sales of product:
Revenue from sales		265000
Differential cost of annual sales of product:
Variable cost of goods sold	130550		=186500*(1-30%)
Variable operating expenses	51450	182000	=85750*(1-40%)
Annual differential income from sales of Product J		83000
Product J should not be discontinued.