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Differential Analysis for a Discontinued Product A condensed income statement by product line for British Beverage...

Differential Analysis for a Discontinued Product

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

Sales $234,400
Cost of goods sold 111,000
Gross profit $123,400
Operating expenses 142,000
Loss from operations $(18,600)

It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 23% 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.

Solutions

Expert Solution

a) Differential Analysis-

Differential Analysis

Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)

March 3

Particulars Continue Royal
Cola (Alternative 1)		 Discontinue Royal
Cola (Alternative 2)		 Differential Effect
on Income
(Alternative 2)
Revenues $234,400 0 ($2,34,400)
Less-Costs:
Variable cost of goods sold 95,460 0 ($95,460)
Variable operating expenses 109,340 0 ($109,340)
Fixed costs-cost of goods sold (14% of 111,000) 15,540 15540 0
Fixed costs-operating expenses (23% of 142,000) 32,660 32,660 0
Income (Loss) ($18,600) ($48,200) ($29,600)

b) Yes., Royal Cola Should be retained in production. In other words if production is discontinued, the loss will be 48,200 against loss of 18,600 due to the consistency of fixed Fixed costs.

As indicated by the differential analysis in part (A), the income would decreased by $29,600 (more) if the product is discontinued. In other words the loss would increased by $29,600 if the product is discontinued due to the consistency of fixed Fixed costs.

In case of any doubt please it in the comment box.

Thanks & all the best.....

ekkarill92 answered 1 year ago
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