Question

The division manager of Division B received the following operating income data for the past​ year:

Division B of Deisel, Inc.	Income Statement	For the Year Ended December 31, 2018
Product Line		T205	B179	Total
	Net Sales Revenue	$370,000	$390,000	$760,000
	Cost of Goods Sold:
	Variable	41,000	39,000	80,000
	Fixed	250,000	68,000	318,000
	Total Cost of Goods Sold	291,000	107,000	398,000
	Gross Profit	79,000	283,000	362,000
	Selling and Administrative Expenses:
	Variable	61,000	76,000	137,000
	Fixed	56,000	20,000	76,000
	Total Selling and Administrative Expenses	117,000	96,000	213,000
	Operating Income (Loss)	$(38,000)	$187,000	$149,000

2a. Prepare a differential analysis to show whether Division B should drop the T205 product line. ​(Enter decreases to profits with a parentheses or minus​ sign.)

Answer 1

Differential analysis of Division B

Product line		B179	T205	Different
	Net sales revenue	$ 390000	$ 370000	$ 20000
	Cost of goods sold
	Variable	39000	41000	(2000)
	Fixed	68000	250000	(182000)
	Total	107000	291000	(184000)
	Gross profit	283000	79000	204000
	Selling exp
	Variable	76000	61000	15000
	Fixed	20000	56000	(36000)
	Total	96000	117000	(21000)

Operating income. 187000. (38000). 225000

Answer 2

To determine whether Division B should drop the T205 product line, we need to perform a differential analysis comparing the income that can be earned by keeping the product line versus dropping it.

Differential Analysis:

	Keep T205	Drop T205	Difference
Net Sales	$370,000	$0	$370,000
Variable Costs	$41,000	$0	$41,000
Contribution Margin	$329,000	$0	$329,000
Fixed Costs	$306,000	$306,000	$0
Operating Income (Loss)	$23,000	($306,000)	($283,000)

The analysis shows that if Division B drops the T205 product line, it will incur a loss of $283,000. Therefore, based on this analysis, Division B should keep the T205 product line.

Note: The fixed costs associated with the T205 product line are not relevant to the decision of whether to drop the product line since they will be incurred regardless of whether the product line is kept or dropped.