Question

1. Sugartown, Inc. has three product lines in its retail stores: cookies, cakes, and candy. The allocated fixed costs are based on units sold and are unavoidable. Results of June follow:

	Cookies	Cakes	Candy	Total
Units sold	2,400	1,600	2,000	6,000
Revenue	25,000	50,000	75,000	150,000
Variable department costs	12,000	37,000	41,000	90,000
Direct fixed costs	6,200	8,000	19,000	33,200
Allocated fixed costs	5,000	6,500	7,000	18,500
Operating income (loss)	$1,800	($1,500)	$8,000	$8,300

Demand of individual products is not affected by changes in other product lines. Prepare an incremental analysis of the effect of dropping the cakes product line. Determine the operating income or loss for Sugartown after the cakes product line is dropped.

Answer 1

Incremental analysis
	With cookies	Without cookies	Increase (decrease) in income
Revenue	$ 1,50,000.00	$ 1,00,000.00	$ (50,000.00)
Variable department costs	$      90,000.00	$     53,000.00	$    37,000.00
Direct fixed costs	$      33,200.00	$     25,200.00	$       8,000.00
Allocated fixed costs	$      18,500.00	$     18,500.00	$                    -
Operating income (loss)	$        8,300.00	$       3,300.00	$    (5,000.00)

Working

	Cookies	Cakes	Candy	Total
Units sold	2,400		2,000	4,400
Revenue	$ 25,000.00		$ 75,000.00	$ 1,00,000.00
Variable department costs	$ 12,000.00		$ 41,000.00	$     53,000.00
Direct fixed costs	$    6,200.00		$ 19,000.00	$     25,200.00
Allocated fixed costs	$    5,000.00	$ 6,500.00	$     7,000.00	$     18,500.00
Operating income (loss)	$    1,800.00	$(6,500.00)	$     8,000.00	$       3,300.00

Net total income befor dropping Cakes	$               8,300.00
Net total income after dropping Cakes	$               3,300.00
Decrease in income	$               5,000.00