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:

It is estimated that 12% 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.

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".

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)

$  

$  

$  

Sales $232,300 Cost of goods sold 111,000 Gross profit $121,300 Operating expenses 142,000 Loss from operations $(20,700)

Explanation / Answer

a) Differential Analysis as on March 3, 2014 (Amount in $)

After discontinuing the Royal Cola the loss of the company will increased by $21,020. Therefore the Royal Cola should be continued (Alternative 1)

Particulars Continue Royal Cola Discontinue Royal Cola Differential effect on Income Revenues 232,300 0 (232,300) Costs: Variable cost of goods sold (111,000*88%) 97,680 0 97,680 Variable operating expenses (142,000*80%) 113,600 0 113,600 Fixed costs [(111,000*12%)+(142,000*20%)] 41,720 41,720 0 Income (Loss) (20,700) (41,720) (21,020)

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