Question

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows: A product-line income statement is shown. The statement title is Rhinebeck Company, Product-Line Income Statement, For the Month Ended October 31. There are columns for Hats, Gloves, and Mufflers. In the Hats column, Sales is $71,000, Cost of goods sold is (32,600) (set in parentheses and single-ruled), Gross profit is $38,400, Selling and administrative expenses is (27,400) (set in parentheses and single-ruled), and Operating income (loss) is $11,000 (double-ruled). In the Gloves column, Sales is $105,700, Cost of goods sold is (42,300) (set in parentheses and single-ruled), Gross profit is $63,400, Selling and administrative expenses is (42,800) (set in parentheses and single-ruled), and Operating income (loss) is $20,600 (double-ruled). In the Mufflers column, Sales is $45,000, Cost of goods sold is (27,000) (set in parentheses and single-ruled), Gross profit is $18,000, Selling and administrative expenses is (25,000) (set in parentheses and single-ruled), and Operating income (loss) is $(7,000) (set in parentheses and double-ruled).Enlarge Image Fixed costs are 20% of the cost of goods sold and 30% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2)

Answer 1

	Hats	Gloves	Mufflers
Sales	71,000	105,700	45,000
Cost of goods sold	(32,600)	(42,300)	(27,000)
Gross Profit	38,400	63,400	18,000
Selling and Admin Expenses	(27,400)	(42,800)	(25,000)
Operating Income(loss)	11,000	20,600	(7,000)
Fixed costs will not be avoided if the Mufflers line is discontinued
Differential Analysis
	Continued	Discontinued	Difference
Sales	221,700	176,700	(45,000)
Cost of goods sold	(101,900)	(80,300)	21,600
Gross Profit	119,800	96,400	(23,400)
Selling and Admin Expenses	(95,200)	(77,700)	17,500
Operating Income(loss)	24,600	18,700	(5,900)
Hence, should not be discontinued as income will fall