Question
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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 2 years agoRelated Solutions
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