Question

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

Sales	$238,000
Cost of goods sold	(111,000)
Gross profit	$127,000
Operating expenses	(146,000)
Operating loss	$(19,000)

It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 21% of the operating expenses are fixed. Because Mango 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 February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2). 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) Mango Cola
February 29
	Continue Mango Cola (Alternative 1)	Discontinue Mango Cola (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Profit (Loss)	$	$	$

Answer 1

	Continue	Discontinue	Differential
	Mango Cola	Mango Cola	Effects
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues	$238,000	0	$238,000
Costs:
Variable cost of goods sold	93,240	0	$93,240
Variable operating expenses	$115,340	0	$115,340
Fixed costs	48,420	48,420	$0
Profit (Loss)	($19,000)	($48,420)	$29,420
Mango Cola should not be discontinued