Question

7. EX.24-06 Decision to Discontinue a Product On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000. Featherweight Shoes Inc. Product-Line Income Statement For the Year Ended April 30, 2018 Children's Shoes Men's Shoes Women's Shoes Total $235,000 $300,000 $500,000 $1,035,000 Sales Costs of goods sold: Variable costs $130,000 $150,000 $220,000 $500,000 41,000 $171,000 $64,000 60,000 $210,000 $90,000 120,000 $340,000 $160,000 221,000 $721,000 $314,000 Fixed costs Total cost of goods sold Gross profit Selling and administrative expenses: Variable selling and admin. expenses Fixed selling and admin. expenses Total selling and admin. expenses Income (Loss) from operations $46,000 35,000 $81,000 $(17,000) $45,000 20,000 $65,000 $25,000 $95,000 25,000 $120,000 $40,000 $186,000 80,000 $266,000 $48,000 a. Prepare a differential analysis to determine the flaw in the general manager's decision. If an amount is zero, enter "O". Use a minus sign to indicate a loss. Differential Analysis Continue (Alternative 1) or Discontinue (Alternative 2) Children's Shoes Continue Children's Discontinue Children's Differential Effect on Shoes Shoes Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable selling and admin. expenses Fixed costs Income (Loss) b. What is the flaw in the decision to discontinue Children's Shoes, if it is assumed fixed costs would not

Answer 1

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Ansa- 0 Differential Analysis Continue (Altd) of discontinue (Nett:2) childeren's Shoes Continue Children's Discontinue Differential effect shoes I childeren's shoes on Income (Alternative t) I (Alternative 2) I (Alternative 2) Revenues $235.000 $0 5Q35,000) Costs ir vourable cost of Goods sold ( 130,000) $0 130,000 variable selling s Admin (46,000) I o .46.000 .. exponses fixed costs (#76,000) (76,000) 0 I Income Closs ) $ (17,000) $ (76,000) $(59,000) & The General manager is not focusing on the differential drevenue and costs. If the childer en snoe's are dis continued the company's Income would decrease by $59000