Prepare and use contribution margin statements for dropping a line decision

(Learning Objective 4)

Members of the board of directors of Security Systems have received the following operating income data for the year just ended:

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 $80,000 and decrease fixed marketing and administrative expenses by $12,000.
Requirements 1. Prepare an incremental analysis to show whether Security Systems should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Systems’ 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. What have you learned from this comparison?

Product Line Industrial Household Systems Systems Total Sales revenue.... $300,000 $310,000 $610,000 Cost of goods sold: Variable ......... $ 38,000 $ 42,000 $ 80,000 Fixed 210,000 69,000 279,000 Total cost of goods sold....... 248,000 111,000 359,000 Gross profit............... 52,000 199,000 251,000 Marketing and administrative expenses: Variable..... 66,000 71,000 137,000 Fixed.................. Total marketing and administrative expenses.. 40,000 22,000 62,000 106,000 93,000 199,000 Operating income (loss) .......... $ (54,000) $106,000 $ 52,000