The condensed product-line income statement for Dish N’ Dat Company for the month of March is as follows:

The condensed product-line income statement for Dish N’ Dat Company for the month of March is as follows:


Dish N’ Dat Company
Product-Line Income Statement
For the Month Ended March 31, 2014
Bowls Plates Cups
Sales$71,000 $105,700 $31,300
Cost of goods sold    32,600    42,300   16,800
Gross profit$38,400 $ 63,400 $14,500
Selling and administrative expenses 27,400 42,800 16,700
Income from operations $11,000 $ 20,600 $ (2,200)


Fixed costs are 15% of the cost of goods sold and 40% of the selling and administrative expenses. Dish N’ Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued.

a. Prepare a differential analysis dated March 31, 2014, to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2).

b. Should the Cups line be retained? Explain.


Answer:


a. Differential Analysis 
Continue Cups (Alt. 1) or Discontinue Cups (Alt. 2) 
March 31, 2014 


Continue 
Cups 
(Alternative 1) 

Discontinue 
Cups 
(Alternative 2) 
Revenues $31,300 $ 0 –$31,300 
Costs:    
Variable cost of goods sold –14,2801
 V
ariable selling and admin.    
expenses –10,020
2 

Fixed costs –9,200
3 
–9,200 0 
Income (Loss) –$  2,200 –$9,200 –$  7,000 
    
$16,800 × (1 – 15%) 
$16,700 × (1 – 40%) 
($16,800 × 15%) + ($16,700 × 40%) 
b. The Cups line should be retained. As indicated by the differential analysis in part (a), 
the income will decrease by $7,000 if the Cups line is discontinued.