On the basis of the following data, the general manager of Sandals Industries In

Question

On the basis of the following data, the general manager of Sandals Industries Inc. decided to discontinue Children's Sandals because it reduced operating income by $65,000. What is the flaw in this decision?

The condensed product-line income statement for Dinner Ware Company is as follows:

Fixed costs are 40% of the cost of goods sold and 18% of the selling and administrative expenses. Dinner Ware assumes that fixed costs would not be significantly affected if the Cups line were discontinued.

Prepare a differential analysis report for all three products.

Should Dinner Ware retain the Cups line?

Explanation / Answer

2)

a) Differential Analysis :-

Working Note :-

Cost of Goods Sold (Variable) = $780000-($780000*40%)

= $780000 - $312000

= $468000

Selling and Admin. Exp. = $300000 - ($300000*18%)

= $300000 - $54000

= $246000

Fixed Cost = ($780000*40%) + ($300000*18%)

= $312000 + $54000

= $366000

b) Yes, Cup line should be retained as it gives marginal income of $261000.

Particulars Continue Cups Discontinue Cups Differential Income/(Loss) Revenues $975000 0 $975000 Less : Cost of Goods Sold(Working Note) ($468000) 0 ($468000) Gross Profit $507000 0 $507000 Less : Selling and Admin.Exp(Working Note) ($246000) 0 ($246000) Less : Fixed Cost (Working Note) ($366000) ($366000) 0 Operating Income/(Loss) ($105000) ($366000) $261000

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