Question

Continue/Discontinue

Shaded cells have feedback.

For the past year, WoolCo has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. You decide to prepare a differential analysis

The area of accounting concerned with the effect of alternative courses of action on revenues and costs.

of the income related to all three products. To begin your analysis, you review the following Condensed Income Statement. Then scroll down to complete the differential analysis.

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WoolCo

Condensed Income Statement

For the Year Ended December 31

1		Raw Wool	Wool Yarn	Rug Yarn	Total Company
2	Sales	$200,000.00	$155,000.00	$167,000.00	$522,000.00
3	Cost of goods sold:
4	Variable costs	$48,000.00	$18,600.00	$37,160.00	$103,760.00
5	Fixed costs	32,000.00	12,400.00	24,780.00	69,180.00
6	Total cost of goods sold	$80,000.00	$31,000.00	$61,940.00	$172,940.00
7	Gross profit	$120,000.00	$124,000.00	$105,060.00	$349,060.00
8	Operating expenses:
9	Variable expenses	$5,000.00	$7,750.00	$53,130.00	$65,880.00
10	Fixed expenses	89,000.00	77,500.00	106,200.00	272,700.00
11	Total operating expenses	$94,000.00	$85,250.00	$159,330.00	$338,580.00
12	Income (loss) from operations	$26,000.00	$38,750.00	$(54,270.00)	$10,480.00

Complete the table using the data in the income statements previously shown to compare the effects of dropping the rug yarn line of products. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter “0”.

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Score: 0/58

Differential Analysis

Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn (Alternative 2)

December 31

1		Continue Rug Yarn (Alternative 1)	Discontinue Rug Yarn (Alternative 2)	Differential Effect on Income (Alternative 2)
2	Revenues
3	Costs:
4	Variable
5	Fixed
6	Total Costs
7	Income (loss)

Answer 1

Differential Analysis
Continue Rug Yarn (Alt 1) or Discontinue Rug Yarn (Alt 2)
Dec 31, 2031
Particulars	Continue Rug Yarn	Discontinue Rug Yarn	Differential effect on income Alternative 2
	Alternative 1	Alternative 2
Revenue	$ 197,000.00	$ 0.00	$ -197,000.00
Costs:
Variable cost	$ 90,270.00	$ 0.00	$ -90,270.00
Fixed Cost	$ 131,000.00	$ 131,000.00	$ 0.00
Total Costs	$ 221,270.00	$ 131,000.00	$ -90,270.00
Income / (Loss)	$ -24,270.00	$ -131,000.00	$ -106,730.00