Question

Members of the board of directors of Security First Security First have received the following operating income data for the year ended: May 31, 2018:

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 $ 80,000 and decrease fixed selling and administrative expenses by $ 10,000.

Read the requirements:

1. Prepare a differential analysis to show whether Safety Point Safety Point should drop the industrial systems product line.

2. Prepare contribution margin income statements to show Safety Point's Safety Point'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?

	Product Line
	Industrial	Household
		Systems	Total
Net Sales Revenue	$340,000	$370,000	$710,000
Cost of Goods Sold:
Variable	36,000	46,000	82,000
Fixed	250,000	69,000	319,000
Total Cost of Goods Sold	286,000	115,000	401,000
Gross Profit	54,000	255,000	309,000
Selling and Administrative Expenses:
Variable	65,000	72,000	137,000
Fixed	45,000	22,000	67,000
Total Selling and Administrative Expenses	110,000	94,000	204,000
Operating Income (Loss)	($56,000)	$161,000	$105,000

.

Requirement 1. Prepare a differential analysis to show whether

Security First Security First

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

	Expected decrease in revenues
	Expected decrease in total variable costs
	Expected decrease in fixed costs
	Expected decrease in total costs
	Expected decrease	in operating income

Requirement 2. Prepare contribution margin income statements to show First's Security First's Security

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.)

Security First
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)

Answer 1