Question

Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time, as shown by the contribution format income statement below:

WILLIAMS PRODUCTS INC.
Income Statement—School Knapsacks
For the Quarter Ended June 30
Sales				$	205,000
Variable expenses:
Variable manufacturing expenses	$	57,400
Sales commissions		22,550
Shipping		6,150
Total variable expenses					86,100
Contribution margin					118,900
Fixed expenses:
Salary of product-line manager		7,250
General factory overhead		41,050	*
Depreciation of equipment (no resale value)		13,500
Advertising—traceable		48,350
Insurance on inventories		3,200
Purchasing department		25,960	↑
Total fixed expenses					139,310
Operating loss				$	(20,410	)

*Allocated on the basis of machine-hours.
^†Allocated on the basis of sales dollars.

     Discontinuing the knapsacks would not affect sales of other product lines and would have no noticeable effect on the company’s total general factory overhead or total purchasing department expenses.

Required:
a. Compute the increase or decrease of net operating income if the Williams Products Inc line is continued or discontinued. (Input all amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net Losses which should be indicated by a minus sign.)

	Keep School Knapsack	Drop School Knapsack	Difference: Operating Income Increase or (Decrease)
Sales
Variable expenses:
Variable manufacturing expenses
Sales commissions
Shipping
Total variable expenses
Contribution margin
Fixed expenses:
Salary of product-line manager
General factory overhead
Depreciation of equipment
Advertising—traceable
Insurance on inventories
Purchasing department
Total fixed expenses
Operating loss

Answer 1

Solution:

Williams Product Inc.
Particulars	Continue	Discontinue	Increase or decrease of net operating income
Sales	$2,05,000	$0	-$2,05,000
Total Variable manufacturing and selling expenses	$86,100	$0	$86,100
Contribution Margin	$1,18,900	$0	-$1,18,900
Fixed Expenses:
Salaries of Product line manager	$7,250	$0	$7,250
Advertising	$48,350	$0	$48,350
Insurance on inventories	$3,200	$0	$3,200
Net Income	$60,100	$0	-$60,100