Question

A condensed income statement by product line for British Beverage Inc. indicated the following for King Cola for the past year: Sales $233,300 Cost of goods sold 110,000 Gross profit $123,300 Operating expenses 145,000 Loss from operations $(21,700) It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King 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 King 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 King Cola (Alt. 1) or Discontinue King Cola (Alt. 2) January 21 Continue King Cola (Alternative 1) Discontinue King 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)

	Continue King Cola (Alternative 1)	Discontinue King Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenue	$               233,300	$                         -	$         (233,300)
Costs:
Variable cost of goods sold	$               (96,800)	$                         -	$              96,800
Variable operating expenses	$             (113,100)	$                         -	$           113,100
Fixed costs	$               (45,100)	$             (45,100)	$                       -
Income (Loss)	$               (21,700)	$             (45,100)	$           (23,400)

Workings:

Variable operating expenses	145000*78%	$             113,100
Fixed operating expenses	145000*22%	$               31,900
Total		$             145,000

Variable cost of goods sold	110000*88%	$               96,800
Fixed Cost of Goods Sold	110000*12%	$               13,200
Total		$             110,000

Fixed Cost
Fixed Cost of Goods Sold	110000*12%	$               13,200
Fixed operating expenses	145000*22%	$               31,900
Total		$               45,100

b. King Cola should be retained as if we discontinue the product, the company will incur an additional loss of $ 23,400.

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