Question

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?

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