Question
In: Accounting
Differential Analysis for a Discontinued Product The condensed product-line income statement for Rhinebeck Company for the...
Differential Analysis for a Discontinued Product
The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:
| Rhinebeck Company Product-Line Income Statement For the Month Ended October 31 |
||||||||
| Hats | Gloves | Mufflers | ||||||
| Sales | $65,700 | $88,500 | $27,100 | |||||
| Cost of goods sold | (25,300) | (32,000) | (14,700) | |||||
| Gross profit | $40,400 | $56,500 | $12,400 | |||||
| Selling and administrative expenses | (29,200) | (35,700) | (16,200) | |||||
| Operating income (loss) | $11,200 | $20,800 | $(3,800) | |||||
Fixed costs are 14% of the cost of goods sold and 35% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.
a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.
| Differential Analysis | |||
| Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers | |||
| October 31 | |||
| Continue Mufflers (Alternative 1) |
Discontinue Mufflers (Alternative 2) |
Differential Effects (Alternative 2) |
|
| Revenues | $ | $ | $ |
| Costs: | |||
| Variable cost of goods sold | |||
| Variable selling and admin. expenses | |||
| Fixed costs | |||
| Profit (Loss) | $ | $ | $ |
b. Should the Mufflers line be retained?
Solutions
Expert Solution
| a. | Differential analysis Report | |||
| Continue Mufflers | Discontinue Mufflers | Differential effect | ||
| Revenues | $ 27,100 | 0 | $ -27,100 | |
| Costs: | ||||
| Variable cost of goods sold | $ -12,642 | 0 | $ 12,642 | |
| Variable selling and administrative cost | $ -10,530 | 0 | $ 10,530 | |
| Fixed costs | $ -7,728 | $ -7,728 | 0 | |
| Income (loss) | $ -3,800 | $ -7,728 | $ -3,928 | |
| b. | Yes | |||
| Workings: | ||||
| Variable cost: | ||||
| Cost of goods sold [$14700 X (100% - 14%)] | = | $ 12,642 | ||
| Selling and administrative cost [$16200X (100% - 35%)] | = | $ 10,530 | ||
| Fixed cost: | ||||
| Cost of goods sold ($14700 X 14%) | = | $ 2,058 | ||
| Selling and administrative cost ($16200 X 35%) | = | $ 5,670 | ||
| Total Fixed costs | = | $ 7,728 |
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