Managerial Accounting: P19-25A Members of the board of directors of Security Force
Managerial Accounting P19-25A Making dropping a product and product-mix decisions Members of the board of directors of Security Force have received the following operating income data for the year just ended: SECURITY FORCE Income Statement For the Year Ended May 31, 2012 Product Line Total Industrial Household Systems Systems Sales revenue 360,000 370,000 730,000 Cost of goods sold: Variable 35,000 42,000 77,000 Fixed 260,000 66,000 326,000 Total cost of goods sold 295,000 108,000 403,000 Gross profit 65,000 262,000 327,000 Marketing and administrative expenses: Variable 66,000 71,000 137,000 Fixed 42,000 22,000 64,000 Total marketing and administrative exp. 108,000 93,000 201,000 Operating income (loss) $(43,000) $169,000 $126,000 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 $82,000 and decrease fixed marketing and administrative expenses by $15,000. Requirements 1. Prepare an incremental analysis to show whether Security Force should drop the industrial systems product line. 2. Prepare contribution margin income statements to show Security Force’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. What have you learned from the comparison in Requirement 2?
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