Question

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

Sales	$233,100
Cost of goods sold	110,000
Gross profit	$123,100
Operating expenses	145,000
Loss from operations	$(21,900)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 21% of the operating expenses are fixed. Since Royal 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 March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
	Continue Royal Cola (Alternative 1)	Discontinue Royal Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)	$	$	$

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would   by $ if the product is discontinued.

Answer 1

a. Prepare a differential analysis, dated March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
	Continue Royal Cola (Alternative 1)	Discontinue Royal Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$233100	$0	-233100
Costs:
Variable cost of goods sold	110000*85% = -93500	0	93500
Variable operating expenses	145000*79% = -114550	0	114550
Fixed costs	-46950	-46950	0
Income (Loss)	-21900	-46950	-25050

b) As indicated by the differential analysis in part (A), the income would Decrease by $25050 if the product is discontinued.