Question

1. Differential Analysis for a Discontinued Product

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:

Rhinebeck Company Product-Line Income Statement For the Month Ended October 31
	Hats			Gloves			Mufflers
Sales	$65,900			$90,200			$26,400
Cost of goods sold	(27,300)			(32,700)			(13,900)
Gross profit	$38,600			$57,500			$12,500
Selling and administrative expenses	(29,700)			(35,300)			(15,300)
Operating income (loss)	$8,900			$22,200			$(2,800)

Fixed costs are 14% of the cost of goods sold and 42% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.

a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

2.Segment analysis for a service company

Charles Schwab Corporation (SCHW) is one of the more innovative brokerage and financial service companies in the United States. The company recently provided information about its major business segments as follows (in millions):

	Investor Services		Advisor Services
Revenues	$5,411		$2,067
Operating income	2,031		962
Depreciation	180		54

a. If Schwab decided to sell its “Advisor Services” accounts to another company, estimate how much operating income would decline under the following assumptions.

Answer 1

Differential analysis
			continue mufflers (alternative 1)	discontinue mufflers (alternative 2)	Differential effect on income
Revenues			26400	0	-26400
costs:
Variable cost of goods sold@ 86%			-11954	0	11954
variable selling & admin expenses@58%			-8874	0	8874
Fixed cost			-8372	-8372	0
income (loss)			-2800	-8372	-5572
2)
			Combined income from opertaion	if advisor service sold
Revenues			7478	5411
less: variable cost			4251	3200
Contribution margin			3227	2211
less: fixed cost			234	234
income from operation			2993	1977
operating income will decline by = 1016
Contribution margin
			Investor services	advisor service
Operating income			2031	962
depreciation			180	54
Contribution margin			2211	1016