Question

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 Sales Cost of goods sold $234,600 109,000 $125,600 142,000 Gross profit Operating expenses Loss from operations $(16,400) It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King Cola is only one of many pre costs and that 22% 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. Differential Analysis Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2) January 21 Differential Effect Continue King Discontinue King on Income Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) b. Should Star Cola be retained? Explain. if the product is discontinued. As indicated by the differential analysis in part (A), the income would

Answer 1

Differential Effect on Continue King Cola Discontinue King Cola (Alternative 1) Income (Alternative 2) (Alternative 2) A. Revenue 2,34,600 -2,34,600 Costs: Variable cost of goods sold 95,920 1,10,760 95,920 Variable operating expenses $ 1,10,760 44,320 $ -16,400 $ Fixed costs 44,320 0 Income (Loss) -44,320 $ -27,920 Workings: Variable operating expenses Fixed operating expenses Total 142000 78% = 1,10,760 142000 22% = $ 31,240 $ 1,42,000 Variable cost of goods sold 109000 88% = 95,920 Fixed Cost of Goods Sold 10900 12% 13,080 $ Total 1,09,000 Fixed Cost of Goods Sold 13,080 Fixed operating expenses Total 31,240 $ 44,320 B YES. Star Cola be retained else it will increase additional loss of $27920 BY $27920 income would REDUCE