chapter 8 P8-50A Prepare and use the contribution margin statements for disconti

Question

chapter 8

P8-50A Prepare and use the contribution margin statements for discontinuing a line decision ( Learning Objective 4) Members of the board of directors of Security Alliance have received the following operating income data for the year just ended: Security Alliance Product Line Contribution Margin Income Statement For the Year Product Lines Industrial Household Company Systems $ 310,000 380,000 690,000 Systems Total Sales revenue Less cost of goods sold: Variable Fixed Gross profit Less marketing and administrative expenses: Variable Fixed Opertating income (loss) 32,000 280,000 (2,000) 268,000 266,000 46,000 66,000 78,000 346,000 69,000 23,000 $ (102,000) $ 176,000 132,000 60,000 37,000 74,000 Members of the board are surprised that the industrial systems product line is losing money. They commision a study to determine whether the company should discontinue the line. Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $80,000 and decrease fixed marketing and administrative expenses by $11,000. Requirements: 1. Prepare and incremental analysis to show whether Security Alliance should discontinue the industrial system product line. 2. Prepare contribution margin income statements to show Security Alliance's total operating income under the two alternatives: (a) witht the industrila systems line and (b) without the line. Comapare the difference between the two alternatives' income numbers to your answer to Requirement 1 What have you learned from this comparison?

Explanation / Answer

1. Incremental Analysis:

Security Alliance should not discontinue the Industrial System product line, as that would lead to a decrease in operating income by $ 124,000. The company will end up with an operating loss of $ 50,000.

2. Contribution Margin Income Statement:

Industrial system makes a positive contribution of $ 265,000 towards fixed costs and profit. Without the contribution margin from Industrial system, the company ends up with an operating loss of $ ( 265,000 - 315,000) = $ 50,000.

Continue Industrial System Discontinue Industrial System Increase ( Decrease) in Net Operating Income $ $ $ Sales Revenue 690,000 380,000 (310,000) Avoidable Costs: Variable Cost of Goods Sold 78,000 46,000 32,000 Variable Marketing and Administrative Expenses 132,000 69,000 63,000 Fixed Cost of Goods Sold 346,000 266,000 80,000 Fixed Marketing and Administrative Expenses 60,000 49,000 11,000 Operating Income $ 74,000 (50,000) (124,000)

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