Question

Differential Analysis for a Discontinued Product

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:

Rhinebeck Company Product-Line Income Statement For the Month Ended October 31
	Hats			Gloves			Mufflers
Sales	$64,100			$89,500			$27,300
Cost of goods sold	(27,000)			(33,800)			(14,000)
Gross profit	$37,100			$55,700			$13,300
Selling and administrative expenses	(30,200)			(35,500)			(16,300)
Operating income (loss)	$6,900			$20,200			$(3,000)

Fixed costs are 16% of the cost of goods sold and 42% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.

a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers
October 31
	Continue Mufflers (Alternative 1)	Discontinue Mufflers (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$27300	$0	$27300
Costs:	________	0	________
The variable cost of goods sold	________	0	________
Variable selling and admin. expenses	_________	_________	0
Fixed costs	_________	_________	_________
Profit (Loss)	$________	$________	$________

Answer 1

Solution a:

Differential Analysis Continue (Alt 1) or Discontinue (Alt 2) Mufflers October 31
Particulars	Continue Mufflers (Alt 1)	Discontinue Mufflers (Alt 2)	Differential Effects (Alt 2)
Revenues	$27,300.00	$0.00	-$27,300.00
Costs:
Variable cost of goods sold	-$11,760.00	$0.00	$11,760.00
Variable selling and admin expenses	-$9,454.00	$0.00	$9,454.00
Fixed costs	-$9,086.00	-$9,086.00	$0.00
Profit (Loss)	-$3,000.00	-$9,086.00	-$6,086.00