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 British Beverage Inc. indicated the following for King Cola for the past year:

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 King 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, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

b. Should King Cola be retained?

Sales $232,500 Cost of goods sold 111,000 Gross profit $121,500 Operating expenses 144,000 Loss from operations $(22,500)

Explanation / Answer

Differential analysis :

b) King cola should be retained

Continue King Cola (Alternative 1) Discontinue King Cola (Alternative 2) Differential Effect on Income (Alternative 2) Revenue 232500 0 -232500 Costs Variable cost of goods sold -96570 0 96570 Variable operating expenses -115200 0 115200 Fixed cost -43230 -43230 0 Income (loss) -22500 -43230 -20730

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