Question

Differential Analysis for a Discontinued Product

A condensed income statement by product line for Warrick Beverage Inc. indicated the following for Mango Cola for the past year:

Sales	$236,800
Cost of goods sold	(109,000)
Gross profit	$127,800
Operating expenses	(144,000)
Operating loss	$(16,200)

It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 21% of the operating expenses are fixed. Because Mango 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 February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue (Alt. 1) or Discontinue (Alt. 2) Mango Cola
February 29
	Continue Mango Cola (Alternative 1)	Discontinue Mango Cola (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Profit (Loss)	$	$	$

Answer 1

Answer-a)-

WARRICK BEVERAGE INC.
DIFFERENTIAL ANALYSIS
PARTICULARS	CONTINUE MANGO COLA	DISCONTINUE MANGO COLA	NET INCOME INCREASE (DECREASE)
	$	$	$
Sales	236800	0	-236800
Less- Variable Costs
Cost of goods sold	$109000*87%=$94830	0	94830
Operating expenses	$144000*79%= $113760	0	113760
Total Variable costs	208590	0	208590
Contribution margin	28210	0	-28210
Less- Fixed costs
Cost of goods sold	$109000*13%=$14170	14170	0
Operating expenses	$144000*21%= $30240	30240	0
Total Fixed costs	44410	44410	0
Net Income (Loss)	-16200	-44410	-28210

Mamgo cola should not be discontinued.