Question

Differential Analysis Report for a Discontinued Product

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

Sales	$233,900
Cost of goods sold	(108,000)
Gross profit	$125,900
Operating expenses	(142,000)
Operating loss	$(16,100)

It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be significantly affected if the product is discontinued.

a. Prepare a differential analysis report for the proposed discontinuance of King Cola.

British Beverage Inc.
Proposal to Discontinue King Cola
Differential Analysis Report
Differential revenue from annual sales of King Cola:
Cost of goods sold		$
Differential cost of annual sales of King Cola:
Gross profit	$
Fixed operating expenses
Net profit		$