Differential Analysis for a Discontinued Product A condensed income staement by

Question

Differential Analysis for a Discontinued Product A condensed income staement by product line for British Beverage Inc. indicated the following for Royal Cola for the past yea Sales Cost of goods sold Gross profit $232,000 109,000 $123,000 145,000 $(22,000) Loss from operations It is estimated that 15% 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. a. Prepare a differential analysis, dated March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "O". Use a minus sign to indicate a loss.

Explanation / Answer

Answer a.

Differential Analysis

Alternative 1: Continue Royal Cola

Alternative 2: Discontinue Royal Cola

As indicated in differential analysis in Part (A), the income would be decreased by $ 26,250 if the product is discontinued.

Alternative 1 Alternative 2 Revenue 2,32,000 -   Costs: Variable cost of goods sold 92,650 -   Variable Operating Expense 1,13,100 -   Net Contribution 26,250 -   Fixed Cost 48,250 48,250 Income/(Loss) -22,000 -48,250

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