Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net profit for Product J of $2,750. This net profit resulted from sales of $275,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. Prepare a differential analysis report dated February 8 of the current year. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Question

Business

Liberty Phillips

8 March, 18:59

Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net profit for Product J of $2,750. This net profit resulted from sales of $275,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. Prepare a differential analysis report dated February 8 of the current year. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

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Answers (1)

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Julius Sloan · Answer 1

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Variable Cost = Cost of Goods Sold * (100 - Estimate Percentage of Cost of Good Sold) + Operating Expenses * (100 - Operating Expenses Fixed Percentage)

= 186,500 * (100 - 30%) + 85,750 * (100 - 40%)

= 186,500 * 70:100 + 85,750 * 60:100

= $130,550 + $51,450

= $182,000

Fixed Cost = Cost of Goods Sold * Estimate Percentage of Cost of Good Sold + Operating Expenses * Operating Expenses Fixed Percentage

= $186,500 * 30:100 + $85,750 * 40:100

= $55,950 + $34,300

= $90,250

Differential analysis

Particular Product J continue Product J discontinue Difference on income

Sales 275,000 0 - 275,000

Variable cost 182,000 0 182,000

Fixed cost 90,250 90,250 0

Income (Sales-Variable Cost-Fixed Cost) 2,750 - 90,250 - 93,000

According to the analysis, project J should not be discontinue because if project j discontinue variable cost doesn't occur, but fixed costs still occur.