Question

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

Sales	$388,400
Cost of goods sold	186,600
Gross profit	$201,800
Operating expenses	250,100
Loss from operations	$ (48,300)

It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 26% 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.

	Required:
a.	Prepare a differential analysis dated January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
b.	Should Fruit Cola be retained? Explain.

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Fixed costs
Gain on sale of investments
Income (loss)
Loss on sale of investments
Revenues
Variable cost of goods sold
Variable operating expenses

a. Prepare a differential analysis dated January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Continue (Alternative 1) or Discontinue (Alternative 2) Fruit Cola

January 5

1	(Labels in this column)	Continue Fruit Cola	Discontinue Fruit Cola	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8

b. Should Fruit Cola be retained? Explain.

No

Yes

As indicated by the differential analysis in part (a), the income would [increase/decrease] by $________ if the product is discontinued.

Answer 1

Solution a:

Differential Analysis - Continue Fruit Cola (alternative 1) or DiscontinueFruit Cola (Alternative 2)
Labels	Continue Fruit Cola (alternative 1)	Discontinue Fruit Cola (alternative 2)	Differential effect on income (Alternative 2)
	Amount	Amount
Revenue	$388,400.00	$0.00	-$388,400.00
Costs:
Varaible Cost Of Goods Sold	$130,620.00	$0.00	-$130,620.00
Variable Operating Expenses	$185,074.00	$0.00	-$185,074.00
Fixed Cost (Fixed COGS 30%+ Fixed operating Expenses 26%)	$121,006.00	$121,006.00	$0.00
Income / (Loss)	-$48,300.00	-$121,006.00	-$72,706.00

Solution b:

Yes, Fruit cola should be retained since the income would decrease by $72,706 if the product is discontinued.