Question

Differential Analysis for a Discontinued Product

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

Sales	$232,700
Cost of goods sold	108,000
Gross profit	$124,700
Operating expenses	142,000
Loss from operations	$(17,300)

It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King 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 King 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 King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
January 21
	Continue King Cola (Alternative 1)	Discontinue King 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.

Answer 1

Differential Analysis
Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
January 21
	Continue King	Discontinue King	Differential Effect
	Cola (Alternative 1)	Cola (Alternative 2)	on Income
			(Alternative 2)
Revenues	232700	0	-232700
Costs:
Variable cost of goods sold	-95040	0	95040
Variable operating expenses	-110760	0	110760
Fixed costs	-44200	-44200	0
Income (Loss)	-17300	-44200	-26900
Star Cola should be retained.
As indicated by the differential analysis in part (A), the income would decrease by $26900 if the product is discontinued
Workings:
Variable cost of goods sold	=108000*(1-12%) = 95040
Variable operating expenses	=142000*(1-22%) = 110760
Fixed costs	=(108000*12%)+(142000*22%)=44200