Question

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 $65,800 $88,700 $27,200 (26,100) (33,000) (13,900) Cost of goods sold Gross profit Selling and administrative expenses $39,700 $55,700 $13,300 (28,700) (35,200) (15,000) Operating income (loss) $11,000 $20,500 $(1,700) Fixed costs are 17% of the cost of goods sold and 44% 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) Revenues 27,200 0 -27,200 Costs: Variable cost of goods sold Variable selling and admin. expenses Fixed costs Profit (Loss) b. Should the Mufflers line be retained?

Answer 1

Solution :

(a) Differential Analysis :

	Continue Mufflers(Alternative 1)	Discontinue Mufflers(Alternative 1)	Differential Effects (Alternative 2)
Revenue	$ 27,200	$ 0	($ 27,200)
Costs :
Variable Cost of Goods Sold ($ 13,900 * 0.83)	($ 11,537)	$ 0	$ 11,537
Variable Selling and Admin Expenses ($ 15,000 * 0.56)	($ 8,400)	$ 0	$ 8,400
Fixed Costs ($ 13,900 * 0.17) + ($ 15,000 * 0.44)	($ 8,963)	($ 8,963)	$ 0
Profit (Loss)	($ 1,700)	($ 8,963)	($ 7,263)

(b) Should the Muffer line be retained : Yes, because discontinung the muffler line will increases the losses by $ 7,263.

Note : Please replace the positive/ negative signs in differential column if you face any any problem for entering figure.

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