Question

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

Differential Analysis for a Discontinued Product

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

 Sales \$233,300 Cost of goods sold 110,000 Gross profit \$123,300 Operating expenses 143,000 Loss from operations \$(19,700)

It is estimated that 15% 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 \$ 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 \$233300 \$0 -233300 Costs: Variable cost of goods sold 110000*85% = -93500 0 93500 Variable operating expenses 143000*81% = -115830 0 115830 Fixed costs -43670 -43670 0 Income (Loss) \$-19700 \$-43670 \$-23970

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would decrease by \$23970 if the product is discontinued.

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