On the basis of the following data, the general manager of
Hawkeye Shoes Inc. decided to discontinue Children’s Shoes because
it reduced operating income by $30,000.
Hawkeye Shoes Inc. Product-Line Income Statement For the Year Ended November 30, 20Y8 |
||||||||||
Children's Shoes | Men's Shoes | Women's Shoes | Total | |||||||
Sales | $280,000 | $300,000 | $500,000 | $1,080,000 | ||||||
Costs of goods sold: | ||||||||||
Variable costs | $(135,000) | $(150,000) | $(220,000) | $(505,000) | ||||||
Fixed costs | (45,000) | (60,000) | (120,000) | (225,000) | ||||||
Total cost of goods sold | $(180,000) | $(210,000) | $(340,000) | $(730,000) | ||||||
Gross profit | $100,000 | $90,000 | $160,000 | $350,000 | ||||||
Selling and administrative expenses: | ||||||||||
Variable selling and admin. expenses | $(100,000) | $(45,000) | $(95,000) | $(240,000) | ||||||
Fixed selling and admin. expenses | (30,000) | (20,000) | (25,000) | (75,000) | ||||||
Total selling and admin. expenses | $(130,000) | $(65,000) | $(120,000) | $(315,000) | ||||||
Operating income (loss) | $(30,000) | $25,000 | $40,000 | $35,000 |
a. Prepare a differential analysis to determine the flaw in the general manager’s decision. 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) Children’s Shoes | |||
November 30 | |||
Continue Children's Shoes (Alternative 1) |
Discontinue Children's Shoes (Alternative 2) |
Differential Effects (Alternative 2) |
|
Revenues | $ | $ | $ |
Costs: | |||
Variable cost of goods sold | |||
Variable selling and admin. expenses | |||
Fixed costs | |||
Profit (Loss) | $ | $ | $ |
b. What is the flaw in the decision to discontinue Children’s Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?
The general manager is not focusing on the differential revenues and costs.
If the children’s Shoes are discontinued, the company's loss would increase by $.
Statement showing differential Income | |||
Continue | Discontinue | Differential Effect on Income | |
Revenues | $280,000 | $0 | -$280,000 |
Costs: | |||
Variable cost of goods sold | -$135,000 | $0 | $135,000 |
Variable selling and administrative expenses | -$100,000 | $0 | $100,000 |
Fixed costs (45000+30000) | -$75,000 | -$75,000 | $0 |
Income (loss) | -$30,000 | -$76,000 | -$46,000 |
If the children shoes are discontinued, the company's loss would increase by $46000.
On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to...
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