3 Differential Analysis for a Discontinued Product A condensed income statement

Question

3

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:

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 21% 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, 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?

4

Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $60 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 38% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $27.00 Direct labor 22.00 Factory overhead (38% of direct labor) 8.36 Total cost per unit $57.36 If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 16% of the direct labor costs. Hide a. Prepare a differential analysis, dated October 11, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter zero "0". Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) October 11, 2014 Make Carrying Case (Alternative 1) Buy Carrying Case (Alternative 2) Differential Effect on Income (Alternative 2) Costs: Purchase price $ $ $ Direct materials per unit Direct labor per unit Variable factory overhead per unit Fixed factory overhead per unit Income (Loss) $ $ $ b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision.

Sales $232,600 Cost of goods sold 109,000 Gross profit $123,600 Operating expenses 145,000 Loss from operations $(21,400)

Explanation / Answer

Since the variable cost and variable operating cost has the fixed companent in that it has been considered separately and there wont be any impact or less expenses even if the production is shut down.

Particulars Continue Royal Cola (Alternative 1) Discontinue Royal Cola (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 232600 0 -232600 Costs: Variable cost of goods sold 92650 0 92650 Variable operating expenses 114550 0 114550 Fixed costs 46800 46800 0 Income (Loss) -21400 -46800 -25400

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