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

ekkarill92 answered 1 year ago

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