Acc350 Managerial Accounting: P20-23A Members of the board of directors of Safe Zone

Acc350 Managerial Accounting
P20-23A Making dropping a product and product-mix decisions
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 Total
Industrial Household
Systems Systems
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 Zone'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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