Differential Analysis for a Discontinued Product A condensed income statement by

Question

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 $233,800 Cost of goods sold 109,000 Gross profit $124,800 Operating expenses 143,000 Loss from operations $(18,200) It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 22% 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 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?

Explanation / Answer

Solution :

Continued

Discontinued

Differencial effect

SALES

233800

0

-233800

COGS

109000

17440

-91560

GP

124800

-17440

-142240

OPERATING EXPENSE

143000

31460

-111540

LOSS FROM OPERATION

-18200

-48900

-30700

Royal cola should be retained as it has lower loss than if discontinued.

Continued

Discontinued

Differencial effect

SALES

233800

0

-233800

COGS

109000

17440

-91560

GP

124800

-17440

-142240

OPERATING EXPENSE

143000

31460

-111540

LOSS FROM OPERATION

-18200

-48900

-30700

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