Question

Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net loss for Product J of $12,250. This net loss resulted from sales of $260,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. Required: Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J. Use a minus sign to indicate numbers to be subtracted or negative numbers. If there is no amount or an amount is zero, enter "0". Below the report, indicate whether Oceanside Company should continue or discontinue to manufacture Product J.

Answer 1

Product J should not be discontinued.

Explanation;

	If Product J is continued	If Product J is discontinued
Sales revenue	$260000	($260000)
Less: Cost of goods sold	($186500)	$130550
Gross margin	$73500	($129450)
Less: Operating expense	($85750)	$51450
Net loss	($12250)	($78000)

Working Note:

1. As it is given that 30% of cost of goods sold is fixed that means 70% is variable hence if product J is discontinued then 70% of cost of goods sold will be saves ($186500 *0.7) = $130550

2. As it is given that 40% of operating expesne is fixed that means 60% is variable hence if product J is discontinued then 60% of operating expense will be saves ($85750 *0.6) = $51450

Thus it is clear that when product J is discontinued then there will be a net loss of $78000 but when product J is continnued then there will be a net loss of $12250. So it is suggested not to discontinued product J because it will increase the net losses.