Question

Decision to Discontinue a Product

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)	$	$	$

Answer 1

Answer-

HAWKEYE SHOES INC.
DIFFERENTIAL ANALYSIS
FOR THE MONTH ENDED NOVEMBER 30, 20Y8
PARTICULARS	CONTINUE CHILDREN'S SHOES	DISCONTINUE CHILDREN'S SHOES	NET INCOME INCREASE (DECREASE)
	$	$	$
Sales	280000	0	-280000
Less- Variable Costs
Cost of goods sold	135000	0	135000
Selling and adminstrative expenses	100000	0	100000
Total Variable costs	235000	0	235000
Contribution margin	45000	0	-45000
Less- Fixed costs
Cost of goods sold	45000	45000	0
Selling and adminstrative expenses	30000	30000	0
Total Fixed costs	75000	75000	0
Net Income (Loss)	-30000	-75000	-45000