Question

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	$64,700			$90,400			$26,700
Cost of goods sold	27,000			33,400			14,700
Gross profit	$37,700			$57,000			$12,000
Selling and administrative expenses	29,700			34,600			14,500
Income from operations	$8,000			$22,400			$(2,500)

Fixed costs are 12% 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	$fill in the blank a77d910bb021015_1	$fill in the blank a77d910bb021015_2	$fill in the blank a77d910bb021015_3
Costs:
Variable cost of goods sold	fill in the blank a77d910bb021015_4	fill in the blank a77d910bb021015_5	fill in the blank a77d910bb021015_6
Variable selling and admin. expenses	fill in the blank a77d910bb021015_7	fill in the blank a77d910bb021015_8	fill in the blank a77d910bb021015_9
Fixed costs	fill in the blank a77d910bb021015_10	fill in the blank a77d910bb021015_11	fill in the blank a77d910bb021015_12
Income (Loss)	$fill in the blank a77d910bb021015_13	$fill in the blank a77d910bb021015_14	$fill in the blank a77d910bb021015_15

b. Should the Cups line be retained?

Answer 1

Differential analysis

continue cups(alt 1) or Discontinue cups (alt 2)

December 31,2012

	continue cups (alt 1)	Discontinue cups (alt 2)	Differential effect on income(alt 2)
Revenues	$26,700	0	$26,700
costs
variable cost of goods sold	12,936 1	0	12,936
variable selling and admin expenses	8,555 2	0	8,555
fixed costs	7,709	7,709	0
income (loss)	(2,500)	$7,709	$5,209

¹$14,700 × (1 – 12%)

²$14,500 × (1 – 41%)

³($14,700 × 12%) + ($14,500 × 41%)

b.

The Cups line should be retained. As indicated by the differential analysis in part (a), the income would decrease by $5,209 if the Cups line were discontinued.