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 $12,250. This net loss
resulted from sales of $260,000, 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. However, because of the net loss, management is
considering the elimination of the unprofitable endeavor. 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.
ANS:

Oceanside Company
Proposal to Discontinue Product J
February 8, 20--

Differential revenue from annual sales of product:
Revenue from sales
Differential cost of annual sales
of product:
Variable cost of goods sold
Variable operating expenses
Annual differential income from
sales of Product J

Answer 1

Ocean company Proposal to discontinue product J February 8, 20--
Differential revenue from annual sales of product:
	Revenue from sales		260000
Differential Cost from annual sales of product:
	Variable cost of goods sold	130550
	Variable operating expense	51450	182000
Annual differential Income from sales of product J:			78000

Working
Variable cost of goods sold= $186500 x .7 = 130550
Variable operating expense= $85750 X .6 = 51450