Decision to Discontinue a Product
On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000.
| Featherweight Shoes Inc. Product-Line Income Statement For the Year Ended April 30, 20Y8 |
||||||||||
| Children's Shoes | Men's Shoes | Women's Shoes | Total | |||||||
| Sales | $235,000 | $300,000 | $500,000 | $1,035,000 | ||||||
| Costs of goods sold: | ||||||||||
| Variable costs | $130,000 | $150,000 | $220,000 | $500,000 | ||||||
| Fixed costs | 41,000 | 60,000 | 120,000 | 221,000 | ||||||
| Total cost of goods sold | $171,000 | $210,000 | $340,000 | $721,000 | ||||||
| Gross profit | $64,000 | $90,000 | $160,000 | $314,000 | ||||||
| Selling and administrative expenses: | ||||||||||
| Variable selling and admin. expenses | $46,000 | $45,000 | $95,000 | $186,000 | ||||||
| Fixed selling and admin. expenses | 35,000 | 20,000 | 25,000 | 80,000 | ||||||
| Total selling and admin. expenses | $81,000 | $65,000 | $120,000 | $266,000 | ||||||
| Income (Loss) from operations | $(17,000) | $25,000 | $40,000 | $48,000 | ||||||
a. Prepare a differential analysis to determine the flaw in the general manager’s decision. If an amount is zero, enter “0”. Use a minus sign to indicate a loss.
| Differential Analysis | |||
| Continue (Alternative 1) or Discontinue (Alternative 2) Children’s Shoes | |||
| Continue Children's Shoes (Alternative 1) |
Discontinue Children's Shoes (Alternative 2) |
Differential Effect on Income (Alternative 2) |
|
| Revenues | $ | $ | $ |
| Costs: | |||
| Variable cost of goods sold | |||
| Variable selling and admin. expenses | |||
| Fixed costs | |||
| Income (Loss) | $ | $ | $ |
b. What is the flaw in the decision to discontinue Children’s Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?
If the children’s Shoes are discontinued, the company's would by $.Get Custom Essay Writing today.
