Question

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

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.

 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