Question

Discontinue a Segment

Product Tango has revenue of $1,150,000, variable cost of goods sold of $850,000, variable selling expenses of $275,000, and fixed costs of $125,000, creating an operating loss of $(100,000).

a. Prepare a differential analysis as of February 13 to determine if Product Tango should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue Product Tango (Alt. 1) or Discontinue Product Tango (Alt. 2)
February 13
	Continue Product Tango (Alternative 1)	Discontinue Product Tango (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable selling and admin. expenses
Fixed costs
Profit (Loss)	$	$	$

b. Determine if Product Tango should be continued (Alternative 1) or discontinued (Alternative 2).

Answer 1

Answer (a)
Statement showing differential analysis -
To continue or discontinue product Tango
	Continue product tango	Discontinue product tango
	Alternative1	Alternative2	Differentail effects
Revenue	$       11,50,000	$                    -	$                           -
Less:			$                           -
Variable cost of goods sold	$       -8,50,000	$                    -	$                           -
Varaible selling expenses	$       -2,75,000	$                    -	$                           -
Fixed Costs	$       -1,25,000	$       -1,25,000	$                 -25,000
Profit(Loss)	$       -1,00,000	$       -1,25,000	$                 -25,000
Answer (b)
If product Tango is discontinued then fixed costs will not be saved and there will be loss of $ 1,25,000 to the extent of fixed costs thereby increasing loss by $ 25,000
Hence it is better to continue with product tango as the current loss is $ 1,00,000 only