Question

On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $17,000.

Featherweight Shoes Inc.

Product-Line Income Statement

For the Year Ended April 30, 20Y8

1		Children’s Shoes	Men’s Shoes	Women’s Shoes	Total
2	Sales	$235,000.00	$300,000.00	$500,000.00	$1,035,000.00
3	Costs of goods sold:
4	Variable costs	$130,000.00	$150,000.00	$220,000.00	$500,000.00
5	Fixed costs	41,000.00	60,000.00	120,000.00	221,000.00
6	Total cost of goods sold	$171,000.00	$210,000.00	$340,000.00	$721,000.00
7	Gross profit	$64,000.00	$90,000.00	$160,000.00	$314,000.00
8	Selling and administrative expenses:
9	Variable selling and admin. expenses	$46,000.00	$45,000.00	$95,000.00	$186,000.00
10	Fixed selling and admin. expenses	35,000.00	20,000.00	25,000.00	80,000.00
11	Total selling and admin. expenses	$81,000.00	$65,000.00	$120,000.00	$266,000.00
12	Income (loss) from operations	$(17,000.00)	$25,000.00	$40,000.00	$48,000.00

Required:

What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance? (Prepare the Differential Analysis before responding to the questions.)

Prepare a differential analysis to determine the flaw in the general manager’s decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes

1		Continue Children’s Shoes	Discontinue Children’s Shoes	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
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Answer 1

for formula view, refer to the next image -