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Differential Analysis for a Discontinued Product The condensed product-line income statement for Rhinebeck Company for the...

Differential Analysis for a Discontinued Product

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:

Rhinebeck Company
Product-Line Income Statement
For the Month Ended October 31
Hats Gloves Mufflers
Sales $64,700 $89,600 $26,200
Cost of goods sold (26,300) (32,000) (14,000)
Gross profit $38,400 $57,600 $12,200
Selling and administrative expenses (29,100) (35,600) (16,300)
Operating income (loss) $9,300 $22,000 $(4,100)

Fixed costs are 12% of the cost of goods sold and 45% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.

a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers
October 31
Continue
Mufflers
(Alternative 1)
Discontinue
Mufflers
(Alternative 2)
Differential
Effects
(Alternative 2)
Revenues $ $ $
Costs:
Variable cost of goods sold
Variable selling and admin. expenses
Fixed costs
Profit (Loss) $ $ $

b. Should the Mufflers line be retained?

Homework Answers

Answer #1
Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers
31-Oct
Continue Discontinue Differential
Mufflers Mufflers Effects
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues 26200 0 -26200
Costs:
Variable cost of goods sold 12320 0 -12320
Variable selling and admin. expenses 8965 0 -8965
Fixed costs 9015 9015 0
Profit (Loss) -4100 -9015 -4915
b.Yes, should be retained as loss will increase on dropping
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