Chapter 25, Problem 29BP

Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:

 Members of the board are surprised that the industrial systems product line is losing money. 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 $15,000.

Requirements

1. 1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.
2. 2. Prepare contribution margin income statements to show Security Team’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. 3. What have you learned from this comparison in Requirement 2?