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 $236,500 Cost of goods sold 108,000 Gross profit $128,500 Operating expenses 146,000 Loss from operations $(17,500) It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 19% 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) $ $ $ b. Should Star Cola be retained? Explain. As indicated by the differential analysis in part (A), the income would by $

Answer 1

Explanation:

Differential analysis

Continue Royal cola(Alt 1) or dicontinue Royal cola (Alt 2)

January 21

	Continue cups (Alternative 1)	Discontinue cups(Alternative 2)	Differential effect on income ( if alternative 2is chosen)
Revenues	$236500	0	($236500)
Costs:
Variable cost of goods sold(108000×(100%-14%)	($92880)	0	$92880
Variable operating expenses(146000×(100%-19%)	($118260)	0	$118260
Fixed costs[(108000×14%)+(146000×19%)]	($42860)	($42860)	$0
Income (loss)	($17500)	($42860)	($31380)

b) Royal cola should be retained:

Reason:disscontinuation of the Royal cola product line would result in an incremental loss of $31380.To avoid that , it is advisadvisqble to continue the Royal cola product line.