Question

Differential Analysis for a Discontinued Product

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

Sales	$233,900
Cost of goods sold	109,000
Gross profit	$124,900
Operating expenses	144,000
Loss from operations	$(19,100)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 20% 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)

Answer 1

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	$233,900	$0	$-233,900
Costs:
Variable cost of goods sold	-92,650	0	92,650
Variable operating expenses	-115,200	0	115,200
Fixed costs	45,150	45,150	0
Income (Loss)	$-19,100	$-45,150	$-26,050

Fixed cost of goods sold= $109,000*15%= $16,350

Variable cost of goods sold= $109,000-16,350= $92,650

Fixed operating expenses= $144,000*20%= $28,800

Variable operating expenses= $144,000-28,800= $115,200

Fixed costs= Fixed cost of goods sold+Fixed operating expenses

= $16,350+28,800= $45,150

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