Question

Differential Analysis for a Discontinued Product

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

Dish N’ Dat Company Product-Line Income Statement For the Month Ended March 31
	Bowls			Plates			Cups
Sales	$64,100			$88,800			$27,900
Cost of goods sold	25,900			33,100			14,300
Gross profit	$38,200			$55,700			$13,600
Selling and administrative expenses	30,300			34,300			15,700
Income from operations	$7,900			$21,400			$(2,100)

Fixed costs are 13% of the cost of goods sold and 44% 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 March 31 to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)
March 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?

Answer 1

a.

Differential Analysis
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2)
Mar-31
	Continue Cups (Alternative 1)	Discontinue Cups (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$27,900	$0	-$27,900
Costs:
Variable cost of goods sold (14300*87%)	$12,441	$0	$12,441
Variable selling and admin. Expenses (15700*56%)	$8,792	$0	$8,792
Fixed costs (14300*13%+15700*44%)	$8,767	$8,767	$0
Income (Loss)	-$2,100	-$8,767	-$6,667

b.

Yes, the Cups line should be retained.