Question

A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the past year: Sales Cost of goods sold Gross profit Operating expenses Loss from operations It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 18% of the operating expenses are fixed. Because Fruit 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 January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternativ 2). If an amount is zero, enter "O". Use a minus sign to indicate a loss $235,500 109,000 $126,500 146,000 $(19,500) Differential Analysis Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2) Continue Fruit Cola (Alternative 1) Discontinue Fruit Cola (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 235,500 235500v Costs: Variable cost of goods sold91,560 Variable operating expenses 119,720 Fixed costs 91,560 119,720 8,840 X -6,780 | X 0 X -33,060 | X Income (Loss)

Answer 1

	Differential Analysis
	Continue Fruit Cola (Alt 1) or Discontinue Fruit Cola (Alt 2)
		Continue Fruit Cola (Alternative 1)	Discontinue Fruit Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
	Revenues	$235,500		$235,500
	Costs :
	Variable Cost of Goods Sold	91560		91560
	Variable Operating expenses	$119,720		$119,720
	Fixed Costs	$43,720	$43,720	0
	Income (Loss)	($19,500)	($43,720)	$24,220
	The product should not be discontinued because this will lead to loss of revenue to the company
	With Discontinuing the product , loss would be $ 43720 whereas if product is continued the loss would be $ 19500
	Cost of Goods Sold
	Fixed	17440	109000*16%
	Variable	91560	109000*84%
	Operating Expenses
	Fixed	26280	146000*18%
	Variable	119720	146000*82%
	Total Fixed Costs	43720
	It is mentioned that fixed costs will have no material impact if the product is continued which means, the fixed costs would be incurred even if product is discountinued