Keenan Music $--$ Differential Analysis Case

Before the recent proposal of the Specialty Guitar Project, Keenan Music had two product lines that include Acoustic Guitar and Electric Guitar. The company

sold $25,000$ acoustic and $15,000$ electric guitars. The segmented income statement for the company as a whole appears below.

Sales

Variable Expenses

Variable Selling and Admin. Expenses

Variable COGS

Contribution Margin

Depreciation of equipment

Advertising $($traceable to each guitar$)$

Product Design Expense $($traceable to each guitar$)$

Common Fixed Expenses

Net Operating Income$/($Loss$)$

While Keenan Music is making a profit of over $$1$ million, it appears that Electric is not making a profit as a product line. Keenan Music has been trying

different strategies to improve Electric Guitar's profit, but the line continues to make a loss. The CFO of Keenan Music has asked the accountant to consider

dropping the electric product line. If the product line were dropped, the traceable fixed expenses for Electric would be eliminated, but none of the common

fixed expenses would be affected. The equipment used in the production was purchased long time ago and will have no other use or can be sold.

$1$ What is the impact on net operating income by discontinuing the Electric Guitars product line?

Sales

Dropping the Electric Guitar product line will

the company's net income

Should the Electric Guitar product line be dropped?