Question

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.

Answer 1

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