Question

I need help for the below

Members of the board of directors of Control One have received the following operating Income data for the year ended May 31. 2014:

Product Line Industrial Household Systems Systems Total 340.000 $ 390,000 $ 730,000 Sales Revenue Cost of Goods Sold Variable 39,000 200.000 43.000 63.000 82.000 323 000 Fixed 299,000 106,000 405,000 41,000 284 000 325,000 Total Cost of Goods Sold Gross Profit Selling and Administrative Expenses Varuste 86.000 40.000 74.000 28.000 140 000 68,000 Fixed Total Selling and Administrative Expenses 102.000 200.000 182,000 $ 117,000 Operating Income (Loss) $ (65,000) $

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 $83,000 and decrease fixed selling and administrative expenses by $10,000.

Requirements

1. Prepare a differential analysis to show whether Control One should drop the industrial systems product line
2. Prepare contribution margin income statements to show Control One’s total operating income under the two alternative (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?

Answer 1

1.

Differential Analysis
	Keep Industrial Systems Product Line	Drop Industrial Systems Product Line	Increase ( decrease ) in Operating Income
Contribution Margin Lost	$ 0	$ ( 235,000)	$ ( 235,000 )
Avoidable Fixed Costs
Manufacturing	0	83,000	83,000
Selling and Administrative	0	10,000	10,000
Totals	$ 0	$ ( 142,000 )	$ ( 142,000 )

Control One should not drop the Industrial Systems Product Line.

2.

Contribution Margin Income Statement
	With Industrial System Product Line	Without Industrial Systems Product Line
Sales Revenue	$ 730,000	$ 390,000
Less Variable Costs
Cost of Goods Sold	82,000	43,000
Selling and Administrative Expenses	140,000	74,000
Contribution Margin	508,000	273,000
Fixed Costs
Manufacturing	323,000	240,000
Selling and Administrative	68,000	58,000
Operating Income ( loss )	$ 117,000	$ ( 25,000)

Without the Industrial Systems product line, operating income falls by $ 142,000.

3. As long as a product line has a positive contribution margin towards fixed costs, discontinuing it would reduce total operating income.