Question

Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net loss for Product J of $2,750. This net loss resulted from sales of $275,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued.

Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J. If an amount box does not require an entry, leave it blank.

Differential Analysis
Proposal to Discontinue Product J
February 8
	Continue Product J	Discontinue Product J	Differential Effect on Income
	$	$	$
Costs:
	$	$	$
		$
Total costs
Income (loss)	$

Answer 1

Differential Analysis
Proposal to Discontinue Product J
8-Feb
	Continue Product J	Discontinue Product J	Differential Effect on Income	Remarks
	$	$	$
Revenue	275000	0		Income reduces by 275000 (due to absence of sales)
Costs:
Cost of goods sold	186500	55950	-130550	Because 30% of cost of goods sold is fixed, it has to be incurred irrespective of producing J or not.
Operating expenses	85750	34300	-51450	Because 40% of operating expenses is fixed, it has to be incurred irrespective of producing J or not
Total costs	272250	90250	-182000	The net differential cost would be 182000 if production of J is discontinued
Income (loss)	2750	-90250		Considering the notional cost of loss of revenue of 275000, the total impact would be 275000+182000 = 457000