Chapter 11, Problem 4E

Differential analysis for a discontinued product

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:

Fixed costs are 20% of the cost of goods sold and 30% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.

1. a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2).
2. b. Should the Mufflers line be retained? Explain.