Question

Differential Anaysis for a A condensed income statement by product line for Crown Beverage Inc. indicated the folilowing for Royal Cola for the past year: Sales nued Product 238,000 o Cost of goods sold 111,000 Operating expenses Loss from operations It is estimated that 12% of the cost of goods sold represents fixed factory ove 142,000 (15,000) rhead costs and that 22% of the operating expenses are xed Since Royal Cola is on'y one of many products, the fixed costs will not be materialy affected if the product is discontinued. Hintls) a. Prepare a differential analysis, dated March 3, 2014, to determine whether Royal Cola should be continued (Alternative 1) or amount is zero, enter zero "0". Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (A/t. 2) Contin 2)

Answer 1

It is given that 12% of cost of goods sold and 22% of the operating expenses are fixed in nature and so those costs shall be continued even if Royal Cola is dropped or discontinued. So Differential Analysis Continue Royal Cola or Discontinue Royal Cola March 3, 2014 Continue Discontinue Income effect $238,000 $111,000 $13,320 $127,000 ($13,320) $140,320) $0 ($238,000) $97,680 Sales Cost of Goods Sold Gross Profit Operating Expenses $142,000 $31,240 S110,760 Financial advantge or (disadvantage) Decision: Roval Cola should be continued because loss from operations will increase ($15,000) ($44,560 ($29,560) from $15,000 to $29,560 if it is discontinued Explanation: Even if Royala Cola is discontinued, 12% of cost of goods sold ($111,000 x 12%-$13,320) along with 22% of operating expenses ($142,000 x 22%-$31,240) shall be incurred by the firm but without Royal Cola's sales of $238,000. As a result, if Royal Cola is discontinued firm will lose sales to the extent of $238,000 and continue to incur $44,560 (fixed costs) Net result comes to net financial disadvantage of discontinuing Royal Cola of $29,560