Members of the board of directors of Safe Zone have received the following operating income data for the year ended May 31, 2018:
For the Year Ended May 31, 2018
Net Sales Revenue
Cost of Goods Sold:
Total Cost of Goods Sold
Selling and Administrative Expenses:
Total Selling and Administrative Expenses
Operating Income (Loss)
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 $83,000 and decreased fixed selling and administrative expenses by $12,000.
Requirements: 1. Prepare a differential 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 difference between the two alternatives' income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?