Members of the board of directors of Safe Zone have received the following operating

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 Zone’s total operating income under the
two alternatives:
(a) with the industrial systems
line and
(b) without the line. Compare the
differencebetween 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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