Members of the board of directors of Security AlarmsSecurity Alarms have received the following operating...
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Accounting
Members of the board of directors of
Security AlarmsSecurity Alarms
have received the following operating income data for the year ended May 31, 2016 :
Security Alarms
Income Statement
For the Year Ended May 31, 2016
Product Line
Industrial
Household
Systems
Systems
Total
Sales Revenue
$300,000
$390,000
$690,000
Cost of Goods Sold:
Variable
33,000
43,000
76,000
Fixed
260,000
66,000
326,000
Total Cost of Goods Sold
293,000
109,000
402,000
Gross Profit
7,000
281,000
288,000
Selling and Administrative Expenses:
Variable
62,000
75,000
137,000
Fixed
43,000
26,000
69,000
Total Selling and Administrative Expenses
105,000
101,000
206,000
Operating Income (Loss)
$(98,000)
$180,000
$82,000
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 $81,000 and decrease fixed selling and administrative expenses by $12,000
.
Prepare a differential analysis to show whether
Security Alarms
should drop the industrial systems product line.
2.
Prepare contribution margin income statements to show
Security Alarm'sSecurity Alarm'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?
requien 1 :
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 1. Prepare a differential analysis to show whether
Security AlarmsSecurity Alarms
should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.)
Expected decrease in revenues
$(300,000)
Expected decrease in total variable costs
$95,000
Expected decrease in fixed costs
93,000
Expected decrease in total costs
188,000
Expected decrease
in operating income
$(112,000)
Requirement 2. Prepare contribution margin income statements to show
Security Alarm'sSecurity Alarm'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.)
Security Alarms
Contribution Margin Income Statement
For the Year Ended May 31, 2016
Totals With
Totals Without
Change if Industrial
Industrial Systems
Industrial Systems
Systems Is Dropped
Sales Revenue
Variable Costs:
Cost of Goods Sold
Selling and Administrative Expenses
Total Variable Costs
Contribution Margin
Fixed Costs:
Cost of Goods Sold
Selling and Administrative Expenses
Total Fixed Costs
Operating Income (Loss)
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