Question

#6

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	$65,800			$89,700			$27,600
Cost of goods sold	26,500			32,200			15,200
Gross profit	$39,300			$57,500			$12,400
Selling and administrative expenses	30,400			35,100			14,800
Income from operations	$8,900			$22,400			$(2,400)

Fixed costs are 17% of the cost of goods sold and 42% 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?

Answer 1

a) Ans:

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	$27,600	$0	-$27,600
Costs:
Variable cost of goods sold	$12616	-	$12616
Variable selling and admin. expenses	$8584	-	$8584
Fixed costs(6216+2584)	$8800	$8800	-
Income (Loss)	-$2400	$8800	-6400$

Variable cost of goods sold=15200*83%=$12616

Variable cost of selling and administrative expenses=$14,800*58%=$8584

Fixed cost=(15200-12616) + (14800-8584)=$2584+$6216=$8800

b) Ans
The cups line should be continued because the income would decrease by $6399 if the cups were discontinued. It is advisable to continue to remove burden of fixed cost $8800 too.