Members of the board of directors of Security First Security First have received the following operating income data for the year ended: May 31, 2018:

Members of the board are surprised that the industrial systems product line is not profitable. 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 $ 80,000 and decrease fixed selling and administrative expenses by $ 10,000.

Read the requirements:

1. Prepare a differential analysis to show whether Safety Point Safety Point should drop the industrial systems product line.

2. Prepare contribution margin income statements to show Safety Point's Safety Point'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?

Product Line

Industrial

Household

Systems

Total

Net Sales Revenue

$340,000

$370,000

$710,000

Cost of Goods Sold:

Variable

36,000

46,000

82,000

Fixed

250,000

69,000

319,000

Total Cost of Goods Sold

286,000

115,000

401,000

Gross Profit

54,000

255,000

309,000

Selling and Administrative Expenses:

Variable

65,000

72,000

137,000

Fixed

45,000

22,000

67,000

Total Selling and Administrative Expenses

110,000

94,000

204,000

Operating Income (Loss)

($56,000)

$161,000

$105,000

.

Requirement 1. Prepare a differential analysis to show whether

Security First Security First

should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.)

Expected decrease in revenues

Expected decrease in total variable costs

Expected decrease in fixed costs

Expected decrease in total costs

Expected decrease

in operating income

Requirement 2. Prepare contribution margin income statements to show First's Security First's Security

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. (Use parentheses or a minus sign for an operating loss.)

Security First

Contribution Margin Income Statement

For the Year Ended May 31, 2018

Totals With

Totals Without

Change if Industrial

Industrial Systems

Industrial Systems

Systems Is Dropped

Net Sales Revenue

Variable Costs:

Manufacturing

Selling and Administrative

Total Variable Costs

Contribution Margin

Fixed Costs:

Manufacturing

Selling and Administrative

Total Fixed Costs

Operating Income (Loss)