Differential Analysis for a Discontinued Product A condensed income statement by

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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 $233,700 Cost of goods sold 110,000 Gross profit $123,700 Operating expenses 143,000 Loss from operations $(19,300) It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 20% 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. Hide Hint(s) a. Prepare a differential analysis, dated March 3, 2014, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Differential Analysis Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) March 3, 2014 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 Royal Cola be retained? SelectYesNo Check My Work (1 remaining) Icon Key Icon Key Previous Question 2 of 10 Next Exercise 25-3 (Algorithmic) Cengage Learning Cengage Technical Support

Explanation / Answer

Differential analysis as to whether Royal Cola should be discontinued or not:

Contribution margin income statement for Royal Cola

If Royal Cola is discontinued, overall profits would decrease by $ 23,600. Hence, it should not be discontinued.

$ $ Sales revenue 233,700 Variable costs: Manufacturing 95,700 Operating 114,400 210,100 Contribution margin 23,600

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