Question

The product DKN is one of the many products manufactured and sold by Fashion Inc. An income statement by product line for the past year indicated a net loss for Product DKN of Dh24,500. This net loss resulted from sales of Dh520,000, cost of goods sold of Dh373,000, and operating expenses of Dh171,500. 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 DKN 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 DKN is discontinued. Required: Prepare a differential analysis report, dated March /29 /2020 of the current year, on the proposal to discontinue Product DKN.

Answer 1

Fashion Inc.
Proposal to Discontinue Product DKN
Differential revenue from annual sales of product:
Revenue from sales		520,000
Differential cost of annual sales of product:
Variable cost of goods sold (373,000 x 70%)	261,100
Variable operating expenses (171,500 x 60%)	102,900	364,000
Annual differential income from sales of Product		156,000