Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of individual products is not affected by changes in other product lines. 30% of the fixed costs are direct, and the other 70% are allocated. Results of June follow: Sour Cream Ice Cream Yogurt Butter Total Units sold 2,000 500 400 200 3,100 Revenue $ 10,000 $ 20,000 $ 10,000 $ 20,000 $ 60,000 Variable departmental costs 6,000 13,000 4,200 4,800 28,000 Fixed costs 5,000 2,000 3,000 7,000 17,000 Net income (loss) $ (1,000 ) $ 5,000 $ 2,800 $ 8,200 $ 15,000 Prepare an incremental analysis of the effect of dropping the sour cream product line. (Enter negative amounts using either a negative sign preceding the number e. g. -45 or parentheses e. g. (45).) $ $

-2500

Explanation:

Incremental revenue is - $10,000. This is because the sour cream product line will drop.

Incremental variable departmental cost savings = $6,000. This is because the company will no longer incurr the variable cost of the sour cream product line.

Incremental savings in fixed cost =

5000 * 30%

= 5000 * 0.30 = 1,500. This is because only 30% of the fixed costs are direct costs, which will no longer be incurred by the company)

Incremental increase in net income =

(Incremental revenue + Incremental variable departmental cost savings + Incremental savings in fixed cost)

-$10,000 + $6,000 + $1,500 = - $2,500

Incremental increase in net income = -2500

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