On the basis of the following data, the general manager of Featherweight Shoes Inc

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. What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance?

Featherweight Shoes Inc.

Product-Line Income Statement

For the Year Ended April 30, 2014

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 adminstrative 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

Answer:

The flaw in the decision is the failure to focus on the differential revenues and costs, which indicate that operating income would be reduced by $59,000 if Children’s Shoes were discontinued. This differential income from sales of Children’s Shoes can be determined from the following differential analysis: 

Differential Analysis 

Continue Children’s Shoes (Alt. 1) or Discontinue Children’s Shoes (Alt. 2) 

 Continue 

Children’s 

Shoes 

(Alternative 1) 

Revenues $235,000 $ 0 –$235,000 

Costs:    

Variable cost of goods sold –130,000 0 130,000 

Variable selling and admin. expenses –46,000 0 46,000 

Fixed costs –76,000* –76,000 0 

Income (Loss) –$  17,000 –$76,000 –$  59,000 

    *

$41,000 + $35,000