The condensed product-line income statement for Northern Lights Company for the month of August is as follows:

Fixed costs are 30% of the cost of goods sold and 15% of the selling and administrative expenses. Northern Lights Company assumes that fixed costs would not be materially affected if the Socks line were discontinued.
a. Prepare a differential analysis dated September 14 to determine if Socks should be continued (Alternative 1) or discontinued (Alternative 2).
b. Should the Socks line be retained? Explain.

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Northern Lights Company Product-Line Income Statement For the Month Ended August 31 Hats Gloves $ 600,000 $1,400,000 (400,000) (700,000) $ 200,000 $ 700,000 Sales Cost of goods sold Gross profit Selling and administrative expenses Operating income (loss) (75,000) (300,000) $ 125,000 $ 400,000 Socks $375,000 (345,000) $ 30,000 (50,000) $ (20,000)