Question

Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $82,000 and decrease fixed marketing and administrative expenses by $14,000. Members of the board of directors of Security First have received the following operating income data for the year just ended: B(Click the icon to view the operating income data.) Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should discontinue the line. Read the requirements. i Data Table Requirement 1. Prepare an incremental analysis to show whether Security First should discontinue the industrial systems product line. Total Incremental Analysis for Discontinuation Decision Contribution margin lost if Industrial Systems is discontinued Less: Fixed cost savings if Industrial Systems is discontinued Security First Product Line Contribution Margin Income Statement For the Year Operating income if Industrial Systems is discontinued Product lines Industrial Household Company Systems Systems Total 320,000 $ 370,000 $ 690,000 Sales revenue $ Less cost of goods sold: Variable 38,000 270,000 39,000 67,000 77,000 337,000 Fixed Gross profit 12,000 $ 264,000 $ 276,000 Less marketing and administrative expenses: Variable Fixed 62,000 42,000 (92,000) $ 74,000 25,000 165,000 $ 136,000 67,000 73,000 Operating income (loss) $ Choose from any list or enter any number in the input fields and then click Check Answer. Print Done 3 parts 3 partaining - Clear All

1.	Prepare an incremental analysis to show whether Security FirstSecurity First should discontinue the industrial systems product line.
2.	Prepare contribution margin income statements to show Security First's total operating income under the two​ alternatives: (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. What have you learned from this​ comparison?

Answer 1

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Security First
Current contribution margin income statement
	Industrial	Household	Total
Sales	320,000.00	370,000.00	690,000.00
Less: Variable costs
Variable cost of good sold	38,000.00	39,000.00	77,000.00
Variable marketing and admin expense	62,000.00	74,000.00	136,000.00
Contribution margin	220,000.00	257,000.00	477,000.00
Less: Fixed costs
Fixed cost of good sold	270,000.00	67,000.00	337,000.00
Fixed marketing and admin expense	42,000.00	25,000.00	67,000.00
Operating Income (loss)	(92,000.00)	165,000.00	73,000.00
Answer 1	Incremental analysis for Discontinuation Decision
Contribution margin lost if Industrial System Discontinued			220,000.00
Less: Fixed costs savings if Industrial System Discontinued			96,000.00
(82000+14000)
Operating Income will decrease by if Industrial System Discontinued			124,000.00
Answer 2
Current contribution margin income statement with Industrial System
	Industrial	Household	Total
Sales	320,000.00	370,000.00	690,000.00
Less: Variable costs
Variable cost of good sold	38,000.00	39,000.00	77,000.00
Variable marketing and admin expense	62,000.00	74,000.00	136,000.00
Contribution margin	220,000.00	257,000.00	477,000.00
Less: Fixed costs
Fixed cost of good sold	270,000.00	67,000.00	337,000.00
Fixed marketing and admin expense	42,000.00	25,000.00	67,000.00
Operating Income (loss)	(92,000.00)	165,000.00	73,000.00
Current contribution margin income statement without Industrial System
	Industrial	Household	Total
Sales	-	370,000.00	370,000.00
Less: Variable costs
Variable cost of good sold	-	39,000.00	39,000.00
Variable marketing and admin expense	-	74,000.00	74,000.00
Contribution margin	-	257,000.00	257,000.00
Less: Fixed costs
Fixed cost of good sold (reduced by $ 82,000)	188,000.00	67,000.00	255,000.00
Fixed marketing and admin expense (reduced by $ 14,000)	28,000.00	25,000.00	53,000.00
Operating Income (loss)	(216,000.00)	165,000.00	(51,000.00)
Comparison
Operating Income (loss) with Industrial System			73,000.00
Operating Income (loss) without Industrial System			(51,000.00)
Decrease in Operating Income (loss)			124,000.00
What have we learned?
If Industrial System is discontinued the operating income will reduce by $ 124,000 resulting in net operating loss of $ 51,000.