Question

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 $71,000 $105,700 $45,000 Cost of goods sold (32,600) (42,300) (27,000) $38,400 $18,000 Gross profit Selling and administrative expenses $63,400 (42,800) $20,600 (27,400) $11,000 (25,000) Operating income (loss) $(7,000) 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. 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. Differential Analysis Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers October 31 Continue Discontinue Differential Mufflers Mufflers Effects (Alternative 1) (Alternative 2) (Alternative 2) $ 45,000 $ 0 $ 45,000 Revenues

Answer 1

Differential analysis

	Continue mufflers	Discontinue mufflers	Differential effect
Revenues	45000	0	45000
Costs
variable cost of goods sold	-21600	0	-21600
Variable selling and admin expenses	-17500	0	-17500
Fixed costs	-12900	-12900	0
Profit (loss)	-7000	-12900	5900

Company should continue mufflers