On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Children’s Shoes because it reduced operating income by $30,000.
Hawkeye Shoes Inc.
Product-Line Income Statement
For the Year Ended November 30, 20Y8
Children's Shoes Men's Shoes Women's Shoes Total
Sales $280,000 $300,000 $500,000 $1,080,000
Costs of goods sold:
Variable costs $(135,000) $(150,000) $(220,000) $(505,000)
Fixed costs (45,000) (60,000) (120,000) (225,000)
Total cost of goods sold $(180,000) $(210,000) $(340,000) $(730,000)
Gross profit $100,000 $90,000 $160,000 $350,000
Selling and administrative expenses:
Variable selling and admin. expenses $(100,000) $(45,000) $(95,000) $(240,000)
Fixed selling and admin. expenses (30,000) (20,000) (25,000) (75,000)
Total selling and admin. expenses $(130,000) $(65,000) $(120,000) $(315,000)
Operating income (loss) $(30,000) $25,000 $40,000 $35,000
a. Prepare a differential analysis to determine the flaw in the general manager’s decision. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.
Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Children’s Shoes
November 30
Continue
Children's Shoes
(Alternative 1) Discontinue
Children's Shoes
(Alternative 2)
Differential
Effects
(Alternative 2)
Revenues $ $ $
Costs:
Variable cost of goods sold
Variable selling and admin. expenses
Fixed costs
Profit (Loss) $ $ $
b. What is the flaw in the decision to discontinue Children’s Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance?
The general manager is not focusing on the differential revenues and costs.
If the children’s Shoes are discontinued, the company's loss would increase by $.