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. 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.

Required:

Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J. Use a minus sign to indicate numbers to be subtracted or negative numbers. If there is no amount or an amount is zero, enter "0". Below the report, indicate whether Oceanside Company should continue or discontinue to manufacture Product J.

Differential Analysis

Continue Product J (Alternative 1) or Discontinue Product J (Alternative 2)

February 8

1		Continue Product J	Discontinue Product J	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	Revenues
4	Costs:
5	Variable
6	Fixed
7	Total costs
8	Income (loss)

In conclusion, Oceanside Company should pick one

A. continue the manufacturing of Product J

B. discontinue the manufacturing of Product J

Answer 1

		1	2	3=2-1
		CONTINUE	DISCONTINUE	DIFFERNCE
		PRODUCT J	PRODUCT J
A	REVENUE (SALES)	260000	0	-260000
	COSTS:
B	VAARIABLE
i	COST OF GOODS SOLD	130550	0	-130550
	186500*(100-30)/100
ii	OPERATING EXPENSES	51450	0	-51450
	85750*(100-40)/100
C	CONTIBUTION (A-B)	78000	0	-78000
D	FIXED
i	COST OF GOODS SOLD	55950	55950	0
	186500*30/100
ii	OPERATING EXPENSES	34300	34300	0
	85750*40/100
	TOTAL COSTS (B+D)	272250	90250	-182000
	INCOME/(LOSS) (C-D)	-12250	-90250	-78000
PRODUCT J SHOULD BE CONTINUED AS DIFFERNTIAL EFFECT IS NEGATIVE
NOTE: WHENEVER CONTRIBUTION IS POSITIVE AND IT IS GIVEN THAT
FIXED EXPENSES WILL NOT CHANGE THE DIFFERENTIAL EFFECT WILL BE
NEGATIVE AND THE AMOUNT OF DIFFERNTIAL LOSS WILL BE EXACTLY
AMOUNT OF CONTRIBUTION FROM CONTINUING PRODUCT (78000 HERE)