Question

On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000.

What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? (Prepare the Differential Analysis before responding to the questions.)

Foremost Footwear Inc.

Product-Line Income Statement

For the Year Ended April 30, 20Y7

1		Children’s Shoes	Men’s Shoes	Women’s Shoes	Total
2	Sales	$165,000.00	$300,000.00	$500,000.00	$965,000.00
3	Costs of goods sold:
4	Variable costs	$105,000.00	$150,000.00	$220,000.00	$475,000.00
5	Fixed costs	32,000.00	60,000.00	120,000.00	212,000.00
6	Total cost of goods sold	$137,000.00	$210,000.00	$340,000.00	$687,000.00
7	Gross profit	$28,000.00	$90,000.00	$160,000.00	$278,000.00
8	Selling and adminstrative expenses:
9	Variable selling and admin. expenses	$21,000.00	$45,000.00	$95,000.00	$161,000.00
10	Fixed selling and admin. expenses	17,000.00	20,000.00	25,000.00	62,000.00
11	Total selling and admin. expenses	$38,000.00	$65,000.00	$120,000.00	$223,000.00
12	Income (loss) from operations	$(10,000.00)	$25,000.00	$40,000.00	$55,000.00

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Fixed costs
Gain on sale of investments
Income (loss)
Loss on sale of investments
Revenues
Total costs
Variable cost of goods sold
Variable selling and administrative expenses

Differential Analysis

Shaded cells have feedback.

Prepare a differential analysis to determine the flaw in the general manager’s decision. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Score: 63/89

Differential Analysis

Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes

April 30, 20Y7

1		Continue Children’s Shoes	Discontinue Children’s Shoes	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	✔	✔	✔	✔
4	✔
5	✔		✔
6	✔			✔
7	✔		✔
8	✔			✔

Points:

14.87 / 21

Feedback

Check My Work

For continue and discontinue alternatives subtract the costs from the revenue. Separate variable from fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

Questions

Shaded cells have feedback.

What is the flaw in the decision to discontinue Children’s Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?

The general manager is not focusing on the differential revenues and costs.

The general manager has failed to identify the objective of the decision.

The general manager uses only fixed costs to make the decision.

Points:

1 / 1

If the Children Shoes are discontinued, the company'sincome   would decrease   by.

Points:

3 / 3

Feedback

Check My Work

For continue and discontinue alternatives subtract the costs from the revenue. Separate variable from fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

Answer 1

	Differential Analysis
	Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes
	April 30, 20Y7
				Continue Children’s Shoes	Discontinue Children’s Shoes	Differential Effect on Income
				(Alternative 1)	(Alternative 2)	(Alternative 2)
	Sales			165000	0	-165000
	Less;Variable expenses
	Variable cost of goods sold			105000	0	105000
	Variable selling and administrative expenses			21000	0	21000
	Contribution margin			39000	0	-39000
	Less: Fixed costs
	Cost of goods sold			32000	32000	0
	Selling and adminstrative expenses			17000	17000	0
	Net income			-10000	-49000	-39000
	The general manager is not focusing on the differential revenues and costs
	If the Children Shoes are discontinued, the company'sincome   would decrease by $ 39000