Chapter 8, Problem 8.56BP

Prepare and use contribution margin statements for discontinuing a line decision (Learning Objective 4)

Members of the board of directors of Security First have received the following operating income data for the year just ended:

8.4-34 Full Alternative Text

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 discontinue the line. Company accountants estimate that discontinuing the industrial systems line will decrease fixed cost of goods sold by $77,000 and decrease fixed marketing and administrative expenses by $11,000.

Requirements

1. 1. Prepare an incremental analysis to show whether Security First should discontinue the industrial systems product line.
2. 2. Prepare contribution margin income statements to show Security First’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. What have you learned from this comparison?