A condensed income statement by product line for Healthy Beverage Inc. indicated
ID: 2430483 • Letter: A
Question
A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the past year:
It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 19% 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.
a. Prepare a differential analysis dated January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate a loss.
Sales $235,400 Cost of goods sold 110,000 Gross profit $125,400 Operating expenses 143,000 Loss from operations $(17,600)Explanation / Answer
Continue Fruit Cola (Alternative 1)
Discontinue Fruit Cola (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
235400
0
235400
Costs:
Variable cost of goods sold
(110000 * 88%)
=96800
0
-96800
Variable operating expenses
(143000 * 81%)
=115830
0
-115830
Fixed costs
(110000 + 143000 – 96800 – 115830)
=40370
40370
0
Income (Loss)
-17600
-40370
22770
Continue Fruit Cola (Alternative 1)
Discontinue Fruit Cola (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
235400
0
235400
Costs:
Variable cost of goods sold
(110000 * 88%)
=96800
0
-96800
Variable operating expenses
(143000 * 81%)
=115830
0
-115830
Fixed costs
(110000 + 143000 – 96800 – 115830)
=40370
40370
0
Income (Loss)
-17600
-40370
22770
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