Question

# Differential Analysis for a Discontinued Product The condensed product-line income statement for Dish N’ Dat Company...

Differential Analysis for a Discontinued Product

The condensed product-line income statement for Dish N’ Dat Company for the month of May is as follows:

 Dish N' Dat Company Product-Line Income Statement For the Month Ended May 31 Bowls Plates Cups Sales \$71,000 \$105,700 \$33,500 Cost of goods sold 32,600 42,300 20,600 Gross profit \$38,400 \$63,400 \$12,900 Selling and administrative expenses 27,400 42,800 17,200 Income from operations \$11,000 \$20,600 \$(4,300)

Fixed costs are 15% of the cost of goods sold and 30% of the selling and administrative expenses. Dish N' Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued.

a. Prepare a differential analysis dated May 31 to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

 Differential Analysis Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2) For the Month Ended May 31 Continue Cups (Alternative 1) Discontinue Cups (Alternative 2) Differential Effect on Income (Alternative 2) Revenues \$ \$ \$ Costs: Variable cost of goods sold Variable selling and admin. expenses Fixed costs Income (Loss) \$ \$ \$

b. Should the Cups line be retained? Explain.

As indicated by the differential analysis in part (A), the income will by \$ if the Cups line is discontinued.

 a Continue Cups (Alternative 1) Discontinue Cups (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 33500 0 -33500 Costs: Variable cost of goods sold -17510 0 17510 Variable selling and admin. expenses -12040 0 12040 Fixed costs -8250 -8250 0 Income (Loss) -4300 -8250 -3950 b Yes the Cups line should be retained As indicated by the differential analysis in part (A), the income will decrease by \$3950 if the Cups line is discontinued. Workings: Variable cost of goods sold =20600*(1-15%) Variable selling and admin. expenses =17200*(1-30%) Fixed costs =(20600*15%)+(17200*30%) Alternatively expenses can be written without a minus sign