Question

A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit...

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

Sales $235,000
Cost of goods sold 109,000
Gross profit $126,000
Operating expenses 142,000
Loss from operations $(16,000)

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. Because Fruit 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 January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2)
January 5
Continue Fruit Cola (Alternative 1) Discontinue Fruit Cola (Alternative 2) Differential Effect on Income (Alternative 2)
Revenues $ $ $
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss) $ $

Homework Answers

Answer #1

Differential Analysis

Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2)

Januray 5

Continue Fruit Cola (Alternative 1)

Discontinue Fruit Cola (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

235000

0

-235000

Costs:

0

Variable cost of goods sold

93740

0

-93740

Variable operating expenses

112180

0

-112180

Fixed costs

45080

45080

0

Income (Loss)

-16000

-45080

-29080

The product line should not be discontinued because discontinuing will lead to more loss.

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