Question

Members of the board of directors of

Safe ZoneSafe Zone

have received the following operating income data for the year ended May 31 comma 2018 :May 31, 2018:

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​(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

$ 81 comma 000$81,000

and decrease fixed selling and administrative expenses by

$ 14 comma 000$14,000.

Read the requirements

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.Requirement 1. Prepare a differential analysis to show whether

Safe ZoneSafe Zone

should drop the industrial systems product line.​ (Use parentheses or a minus sign to enter decreases to​ profits.)

	Expected decrease in revenues			$(310,000)
	Expected decrease in total variable costs		$105,000
	Expected decrease in fixed costs		95,000
	Expected decrease in total costs			200,000
	Expected decrease	in operating income		$(110,000)

Requirement 2. Prepare contribution margin income statements to show

Safe Zone'sSafe Zone's

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. ​(Use parentheses or a minus sign for an operating​ loss.)

Safe Zone
Contribution Margin Income Statement
For the Year Ended May 31, 2018
	Totals With	Totals Without	Change if Industrial
	Industrial Systems	Industrial Systems	Systems Is Dropped
Net Sales Revenue
Variable Costs:
Manufacturing
Selling and Administrative
Total Variable Costs
Contribution Margin
Fixed Costs:
Manufacturing
Selling and Administrative
Total Fixed Costs
Operating Income (Loss)

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Data Table

Safe Zone

Income Statement

For the Year Ended May 31, 2018

		Product Line
		Industrial	Household
		Systems	Systems	Total
	Net Sales Revenue	$310,000	$370,000	$680,000
	Cost of Goods Sold:
	Variable	39,000	46,000	85,000
	Fixed	250,000	64,000	314,000
	Total Cost of Goods Sold	289,000	110,000	399,000
	Gross Profit	21,000	260,000	281,000
	Selling and Administrative Expenses:
	Variable	66,000	74,000	140,000
	Fixed	45,000	21,000	66,000
	Total Selling and Administrative Expenses	111,000	95,000	206,000
	Operating Income (Loss)	$(90,000)	$165,000	$75,000

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Requirements

1.	Prepare a differential analysis to show whether Safe ZoneSafe Zone should drop the industrial systems product line.
2.	Prepare contribution margin income statements to show Safe Zone'sSafe Zone's 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.
3.	What have you learned from the comparison in Requirement​ 2?

Answer 1

1.

Expected decrease in revenues	$    (310,000)
Expected decrease in total variable costs	$     105,000
Expected decrease in fixed costs	$        95,000
Expected decrease in total costs	$     200,000
Expected decrease in operating income	$   (110,000)

2.

	Total With Industrial Systems	Total Without Industrial Systems	Change
Net Sales Revenue	$     680,000	$     370,000	$    (310,000)
Variable Costs
Manufacturing	$        85,000	$        46,000	$      (39,000)
Selling and administrative	$     140,000	$        74,000	$      (66,000)
Total Variable Costs	$     225,000	$     120,000	$    (105,000)
Contribution Margin	$     455,000	$     250,000	$    (205,000)
Fixed Costs
Manufacturing	$     314,000	$     233,000	$      (81,000)
Selling and administrative	$        66,000	$        52,000	$      (14,000)
Total Fixed Costs	$     380,000	$     285,000	$      (95,000)
Operating Income (Loss)	$        75,000	$      (35,000)	$    (110,000)

3.
It is learned that all of the fixed costs are not avoidable, and if contribution margin is higher than avoidable fixed costs, then there is loss in dropping the line.