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 profit for Product J of $2,750. This net profit resulted from sales of $275,000, 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.

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Should the company continue or discontinue producing Product J? Prepare a differential analysis report to support your answer.

Answer 1

Answer -

Differential Analysis
Proposal to Discontinue Product J
	Continue Product J	Discontinue Product J	Differential Effect on Income
Revenues (x)	$2,75,000	$0	-$2,75,000
Costs:
Variable costs (a)	$1,82,000	$0	$1,82,000
Fixed costs(b)	$90,250	$90,250	$0
Total costs (y) =(a)+(b)	$2,72,250	$90,250	$1,82,000
Income (Loss) (x) - (y)	$2,750	-$90,250	-$93,000

The project J should not be discontinued as it results in loss

Working notes -

Variable cost = 186,500*70%+85,750*60%

= 0

Fixed cost = 186,500*30%+85,750*40%, =186,500*30%+85750*40%

*Even project J is discontinued fixed costs still occur, where as variable cost does not occur

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