Top managers of Boardwalk Manufacturing are alarmed by their operating losses

Question

They are considering dropping the desktop product line. The company accountants have prepared the following analysis to help make this decision.

Boardwalk Manufacturing
Income Statement
For the Year Ended December 31, 20XX

Total Laptop Desktop
Sales Revenue $930,000 $575,000 $355,000
Variable Costs 507,000 267,000 240,000
Contribution Margin 423,000 308,000 115,000
Fixed Costs:
Manufacturing 375,000 225,000 150,000
Selling and Administrative 62,000 45,000 17,000
Total Fixed Costs 437,000 270,000 167,000
Operating Income (Loss) $(14,000 ) $38,000 $(52,000 )

If the company stops selling the desktop product line, the company will be able to avoid 80% of the fixed manufacturing costs and 100% of the fixed selling and administrative costs.

Prepare a differential analysis to show whether Boardwalk Manufacturing should drop the desktop product line. Should the desktop product line be dropped? Explain your answer.
What will be an ideal response

Answer 1

Expected decrease in revenue $( 355,000 )
Expected decrease in total variable costs $240,000
Expected decrease in fixed costs* 137,000 377,000
Expected increase in operating income $22,000

* Avoided fixed costs:
80% of fixed manufacturing costs : $150,000 x 80% = $120,000
100% of fixed selling and administrative costs: 7,000
Total avoided fixed costs: $137,000
The differential analysis shows that Boardwalk Manufacturing should drop the desktop product line. Dropping the desktop product line will increase operating income by $22,000.