Question

On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $17,000.

Featherweight Shoes Inc.

Product-Line Income Statement

For the Year Ended April 30, 20Y8

1		Children’s Shoes	Men’s Shoes	Women’s Shoes	Total
2	Sales	$235,000.00	$300,000.00	$500,000.00	$1,035,000.00
3	Costs of goods sold:
4	Variable costs	$130,000.00	$150,000.00	$220,000.00	$500,000.00
5	Fixed costs	41,000.00	60,000.00	120,000.00	221,000.00
6	Total cost of goods sold	$171,000.00	$210,000.00	$340,000.00	$721,000.00
7	Gross profit	$64,000.00	$90,000.00	$160,000.00	$314,000.00
8	Selling and administrative expenses:
9	Variable selling and admin. expenses	$46,000.00	$45,000.00	$95,000.00	$186,000.00
10	Fixed selling and admin. expenses	35,000.00	20,000.00	25,000.00	80,000.00
11	Total selling and admin. expenses	$81,000.00	$65,000.00	$120,000.00	$266,000.00
12	Income (loss) from operations	$(17,000.00)	$25,000.00	$40,000.00	$48,000.00

Required:

What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance? (Prepare the Differential Analysis before responding to the questions.)

Differential Analysis

Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes

1		Continue Children’s Shoes	Discontinue Children’s Shoes	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	✔
4	✔
5	✔
6	✔
7	✔
8	✔

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Fixed costs
Gain on sale of investments
Income (loss)
Loss on sale of investments
Revenues
Total costs
Variable cost of goods sold
Variable selling and administrative expenses

Answer 1

Differential Analysis
Since fixed costs will not change, they should not be considered for the purpose of tis decision
Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes
1		Continue Children’s Shoes	Discontinue Children’s Shoes	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	Sales	$1,035,000.00	$800,000.00	($235,000.00)
4	Costs:
5	Variable cost of goods sold	$500,000.00	$370,000.00	$130,000.00
6	Variable selling and admin. expenses	$186,000.00	$140,000.00	$46,000.00
7	Fixed costs	301,000.00	301,000.00	0.00
8	Income (Loss)	$48,000.00	($11,000.00)	($59,000.00)