Decision to Discontinue a Product Assignment

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 Accounting homework help today

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