Question

Differential Analysis for a Discontinued Product

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

Sales	$15,000,000
Cost of goods sold	(10,800,000)
Gross profit	$4,200,000
Operating expenses	(8,000,000)
Operating loss	$(3,800,000)

It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Because Mango 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 February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mango Cola
February 29
	Continue Mango Cola (Alternative 1)	Discontinue Mango Cola (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 282f0403bfe3fb4_1	$fill in the blank 282f0403bfe3fb4_2	$fill in the blank 282f0403bfe3fb4_3
Costs:
Variable cost of goods sold	fill in the blank 282f0403bfe3fb4_4	fill in the blank 282f0403bfe3fb4_5	fill in the blank 282f0403bfe3fb4_6
Variable operating expenses	fill in the blank 282f0403bfe3fb4_7	fill in the blank 282f0403bfe3fb4_8	fill in the blank 282f0403bfe3fb4_9
Fixed costs	fill in the blank 282f0403bfe3fb4_10	fill in the blank 282f0403bfe3fb4_11	fill in the blank 282f0403bfe3fb4_12
Profit (Loss)	$fill in the blank 282f0403bfe3fb4_13	$fill in the blank 282f0403bfe3fb4_14	$fill in the blank 282f0403bfe3fb4_15

b. Should Mango Cola be retained?

Answer 1

a. Prepare a differential analysis dated February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mango Cola
February 29
	Continue Mango Cola (Alternative 1)	Discontinue Mango Cola (Alternative 2)	Differential Effects (Alternative 2)
Revenues	15000000	0	-15000000
Costs:
Variable cost of goods sold	-7560000	0	7560000
Variable operating expenses	-6000000	0	6000000
Fixed costs	-5240000	-5240000	0
Profit (Loss)	-3800000	-5240000	-1440000

b. Should Mango Cola be retained?

Yes