The Following Annual Income Statement Is for Outboard Motors Inc

Essay

The following annual income statement is for Outboard Motors Inc. ,a maker of outboard motors for boats.

Outboard Motors is concerned about the losses associated with the 2HP product line and is considering dropping this product line.Allocated fixed costs are assigned to product lines based on sales.If the company eliminates a product line,total allocated fixed costs are assigned to the remaining product lines.All variable costs and direct fixed costs are differential costs.
(1)Using differential analysis,determine whether the company would be better off dropping the 2HP product line or keeping the product line.Clearly state your conclusion.
(2)Assume the company can lease the warehouse space currently being used by the 2HP product line for $11,000 per year.Using a differential analysis,explain how this would affect the company's decision to keep or drop the 2HP product line.