Question

Members of the board of directors of Safety Step have received the following operating income data for the year ended May 31, 2018 

(Click the icon to view the operating income data.) 

Members of the board are surprised that the industrial systems product line is not profitable. 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 $82,000 and decrease fixed selling and administrative expenses by $15,000 

Answer 1

1. Statement showing Incremtal Analysis
Contribution Margin Lost , if Industrial Systment is Discontinued ( 310000-33000-68000)	209000
Less; Fixed Cost Saving if Industrial System is discontinued (82000+15000)	97000
Operating Loss	112000

2.. Totla Analysis of Discontinuing a Product Line
	Total with Industrial Sys A	Total without Industrial Sys B	Difference
Sales Revemue	640000	330000	310000
Variable Expense
COGS	81000	48000	33000
Marketing and Admini. Expense	140000	72000	68000
Total Variable Expense	221000	120000	101000
Contribution Margin	419000	210000	209000
Fixed Expense
Cost og Goods Sold*	298000	216000	82000
Marketing and Admini. Expense**	71000	56000	15000
Total Fixed Expense	369000	272000	97000
Operating Income ( Loss)	50000	-62000	112000
* 216000= 2898000-82000
**56000-71000-15000

3. There is no difference between the operating income under contribution format Income statement and the incremental analysis expected decrease in operating income