Question

The condensed product-line income statement for Dish N' Dat Company for the month of March is as follows:

Dish N' Dat Company
Product-Line Income Statement
For the Month Ended March 31
Bowls Plates Cups
Sales $71,000 $105,700 $31,300
Cost of goods sold 32,600 42,300 16,800
Gross profit $38,400 $63,400 $14,500
Selling and administrative expenses 27,400 42,800 16,700
Income from operations $11,000 $20,600 $(2,200)
Fixed costs are 15% of the cost of goods sold and 40% of the selling and administrative expenses.
Dish N' Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued.
Required:
a. Prepare a differential analysis dated March 31, 2014, to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero 0.

Answer 1

It will generate a financial disadvantage for 44,065 dollar to discontinued the cup division. This division generates a positive contribution which, if discontinued will not help to absorp the common fixed cost fo the firm and move the burden entirely to Bowls Plates division making the profit to decrease.

Step-by-step explanation:

`\left[\begin{array}{cccc}&$Continued&$Discontinued&$Differential\\$sales&105700&0&(105700)\\$variable cost&-61635&0&61635\\$contribution&44065&0&(44065)\\$fixed cost&-23465&-23465&0\\$Result&20600&-23465&(44065)\\\end{array}\right]`

Fixed cost:

42,300 x 15% + 42,800 x 40% = 23,465

Variable cost:

42,300 x (1 - 15%) + 42,800 x (1 - 40%) = 61,635

The differencial will be discontinued less continued column

If the result is positive there is a cost saving if discontinued

if negative there is a loss in contribution if discontinued