Members of the board of directors of Safe Zone have received the following operating income data for

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Members of the board of directors of Safe Zone have received the following operating income data for the year ended May 31, 2012:

SAFE ZONE Income Statement For the Year Ended May 31, 2012 Product Line Industrial Houschold Systems Systems Total $ 370

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $84,000 and decrease fixed marketing and administrative expenses by $14,000.
Requirements
1. Prepare an incremental analysis to show whether Safe Zone should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Safe Zone€™s total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives€™ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement2?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Related Book For  book-img-for-question

Financial and Managerial Accounting

ISBN: 978-0132497978

3rd Edition

Authors: Horngren, Harrison, Oliver

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