Question

A condensed income statement by product line for Yanbu Baking Inc. indicated the following for Almond Cookies for the past year:

Sales	SAR 1,200,000
Cost of goods sold	700,000
Gross profit	500,000
Operating expenses	570,000
Loss from operations	(SAR 70,000)

It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs, and that 25% of the operating expenses are fixed. Because Almond Cookies is only one of the many products, the fixed costs will not be materially affected if the product is discontinued.

Prepare a differential analysis to determine whether Almond Cookies should be continued (Alternative 1) or discontinued (Alternative 2). Should Almond Cookies be retained? Explain and indicate the dollar difference in favor or against.

Answer 1

ANSWER

Statement showing computations
Particulars	Continue	Discontinue	Differential
Sales	1,200,000	-	1,200,000
Less Variable Cost of Goods Sold	560,000	-	560,000
less Variable Operating Expenses	427,500	-	427,500
Contribution = Sales - VC	212,500	-	212,500
Less Fixed Cost of Goods Sold	140,000	140,000	-
less Fixed Operating Expenses	142,500	142,500	-
Net income (Loss) from operations	(70,000.00)	(282,500)	212,500
Moon Cookies should be retained as if it is discontinued then Income will further decrease by $212,500

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