Question

Differential Analysis for a Discontinued Product A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the past year: Sales Cost of goods sold Gross profit $235,200 111,000 Operating expenses $124,200 144,000 $(19,800) Loss from operations It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 18% of the operating expenses are fixed. Because Fruit 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 January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "O". Use a minus sign to indicate a loss. Differential Analysis Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2) January 5 Continue Fruit Cola Discontinue Fruit Cola Differential Effect on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs 1100 Income (Loss) b. Should Fruit Cola be retained?

Answer 1

Differential analysis continue fruit cola (alt 1) discontinue fruit cola (alt 2 ) Jan-05 differential continue fruit discontinue fruit effect on cola(alternative1) cola (alternative 2) income revenue 2352001 235200 costs variable cost of goods sold =86%*111000 95460 0 95460 variable operating 118080 0 118080 fixed costs 41460 41460 income (loss) -19800 41460 -61260 ol YES fruit cola should retained fruit cola should be continued as it contributes 21660 (41460-19800) to the recovery of fixed expenses