Homework Sourseor the past year WoolCorp has experimented with its third pr
or the past year, WoolCorp has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. You decide to prepare a differential analysis of the income related to all three products. To begin your analysis, you review the following condensed income statement. Then scroll down to complete the differential analysis.
WoolCorp
Condensed Income Statement
For the Year Ended December 31, 20Y8
1
Raw Wool
Wool Yarn
Rug Yarn
Total Company
2
Sales
$210,000.00
$155,000.00
$187,000.00
$552,000.00
3
Cost of goods sold:
4
Variable costs
$48,000.00
$18,600.00
$37,170.00
$103,770.00
5
Fixed costs
32,000.00
12,400.00
24,800.00
69,200.00
6
Total cost of goods sold
$80,000.00
$31,000.00
$61,970.00
$172,970.00
7
Gross profit
$130,000.00
$124,000.00
$125,030.00
$379,030.00
8
Operating expenses:
9
Variable expenses
$5,000.00
$7,750.00
$53,120.00
$65,870.00
10
Fixed expenses
89,000.00
77,500.00
106,200.00
272,700.00
11
Total operating expenses
$94,000.00
$85,250.00
$159,320.00
$338,570.00
12
Income (loss) from operations
$36,000.00
$38,750.00
$(34,290.00)
$40,460.00
Complete the following table using the data in the preceding income statement to compare the effects of dropping the rug yarn line of products. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter “0”.
Continue rug yarn
(Alternative 1)
discontinue rug yarn
(Alternative 2)
differential effect on income
(Alternative 2)
| WoolCorp |
| Condensed Income Statement |
| For the Year Ended December 31, 20Y8 |
Solution
Solution:
As there is net financial disadvantage of $96,710 on dropping Rug yarn, therefore company should not discontinue Rug yarn product line.
| Differential Analysis Continue Rug Yarn (Alt 1) or Discontinue Rug Yarn (Alt 2) Dec 31, 20Y8 | |||
| Particulars | Continue Rug Yarn (alt 1) | Discontinue Rug Yarn (alt 2) | Differential effect on income (Alt 2) |
| Amount | Amount | ||
| Revenue | $552,000.00 | $365,000.00 | -$187,000.00 |
| Costs: | |||
| Variable cost | $169,640.00 | $79,350.00 | -$90,290.00 |
| Fixed Cost | $341,900.00 | $341,900.00 | $0.00 |
| Income / (Loss) | $40,460.00 | -$56,250.00 | -$96,710.00 |
