Question

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

Sales	$393,100
Cost of goods sold	189,900
Gross profit	$203,200
Operating expenses	254,400
Loss from operations	$ (51,200)

It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 28% 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.

	Required:
a.	Prepare a differential analysis dated January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
b.	Should Fruit Cola be retained? Explain.

Answer 1

a) Differential analysis

	Continue	Eliminate	Net income increase (decrease)
Sales	393100	0	-393100
Variable cost of goods sold	-151920	0	151920
Variable selling and administrative expense	-183168	0	183168
Contribution margin	58012	0	-58012
Fixed cost of goods sold	-37980	-37980	0
Fixed selling and administrative expense	-71232	-71232	0
Operating income	-51200	-109212	-58012

b) Yes, Fruit cola should be retained because elimination give more loss then retained...if Company eliminate then net operating income decrease by -58012