Members of the board of directors of Security Check 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 $12,000.
Requirements
- 1. Prepare a differential analysis to show whether Security Check should drop the industrial systems product line.
- 2. Prepare contribution margin income statements to show Security Check’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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