Members of the board of directors of Safe Zone have received the following operating
QUESTION
Members of the board of directors
of Safe Zone have received the following operating income data for the year
ended May 31, 2012
P20-23A
Members
of the board of directors of Safe Zone have received the following operating
income data for the year ended May
31, 2012
SAFE
ZONE
Income
Statement
For the Year Ended May 31, 2012
Product Line
Industrial
Systems
Household
Systems
Total
Sales revenue
$ 370,000
$ 390,000
$ 760,000
Cost of goods sold:
Variable
36,000
42,000
78,000
Fixed
260,000
65,000
325,000
Total cost of goods sold
$ 296,000
$ 107,000
$ 403,000
Gross profit
$ 74,000
$ 283,000
$ 357,000
Marketing and administrative
expenses:
Variable
66,000
75,000
141,000
Fixed
44,000
24,000
68,000
Total marketing and administrative exp.
$ 110,000
$ 99,000
$ 209,000
Operating income (loss)
$ (36,000)
$ 184,000
$ 148,000
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 $84,000 and decrease fixed marketing and administrative expenses
by $14,000.
Requirements
1.Prepare an incremental
analysis to show whether Safe Zone should drop the industrial systems product
line.
2.Prepare contribution
margin income statements to show Safe Zoneâs total operating income under the
two alternatives:
(a) with the industrial systems
line and
(b) without the line. Compare the
differencebetween the two alternativesâ income numbers to your answer
to Requirement 1.
3.What have you learned
from the comparison in Requirement 2?
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