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Differential Analysis for a Discontinued Product A condensed income statement by product line for British Beverage...

Differential Analysis for a Discontinued Product

A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year:

Sales $236,000
Cost of goods sold 109,000
Gross profit $127,000
Operating expenses 146,000
Loss from operations $(19,000)

It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 21% of the operating expenses are fixed. Since Royal Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. Prepare a differential analysis, dated March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
Continue Royal
Cola (Alternative 1)		 Discontinue Royal
Cola (Alternative 2)		 Differential Effect
on Income
(Alternative 2)
Revenues $ $ $
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss) $ $ $

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would   by $ if the product is discontinued.

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Answer #1

a. Prepare a differential analysis, dated March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
Continue Royal
Cola (Alternative 1)		 Discontinue Royal
Cola (Alternative 2)		 Differential Effect
on Income
(Alternative 2)
Revenues $236000 $0 -236000
Costs:
Variable cost of goods sold -93740 0 93740
Variable operating expenses -115340 0 115340
Fixed costs -45920 -45920 0
Income (Loss) -19000 $-45920 $-26920

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would Decrease by $26920 if the product is discontinued.

So Star cola would be retained

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