Differential Analysis for a Discontinued Product
The condensed product-line income statement for Dish N’ Dat Company for the month of March is as follows:
Dish N’ Dat Company Product-Line Income Statement For the Month Ended March 31 |
||||||||
Bowls | Plates | Cups | ||||||
Sales | $64,600 | $89,200 | $26,700 | |||||
Cost of goods sold | 25,300 | 31,800 | 15,700 | |||||
Gross profit | $39,300 | $57,400 | $11,000 | |||||
Selling and administrative expenses | 29,100 | 34,600 | 15,300 | |||||
Income from operations | $10,200 | $22,800 | $(4,300) |
Fixed costs are 16% of the cost of goods sold and 41% of the selling and administrative expenses. Dish N’ Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued.
a. Prepare a differential analysis dated March 31 to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate a loss.
Differential Analysis | |||
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2) | |||
March 31 | |||
Continue Cups (Alternative 1) | Discontinue Cups (Alternative 2) | Differential Effect on Income (Alternative 2) | |
Revenues | $ | $ | $ |
Costs: | |||
Variable cost of goods sold | |||
Variable selling and admin. expenses | |||
Fixed costs | |||
Income (Loss) | $ | $ | $ |
b. Should the Cups line be retained?
Continue Cups (Alternative 1) | Discontinue Cups (Alternative 2) | Differential Effect on Income (Alternative 2) | |
Revenues | 26700 | 0 | -26700 |
Costs: | |||
Variable cost of goods sold | -13188 | 0 | 13188 |
Variable selling and admin. expenses | -9027 | 0 | 9027 |
Fixed costs | -8785 | -8785 | 0 |
Income (Loss) | -4300 | -8785 | -4485 |
b | |||
Cups line should be retained | |||
Workings: | |||
Variable cost of goods sold | -13188 | =15700*(1-16%) | |
Variable selling and admin. expenses | 9027 | =15300*(1-41%) | |
Fixed costs | 8785 | =(15700*16%)+(15300*41%) |
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