Question

.

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

Sales	$234,800
Cost of goods sold	110,000
Gross profit	$124,800
Operating expenses	143,000
Loss from operations	$(18,200)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 19% 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.
	Total cost	Fixed cost	Variable expense
Cost of goods sold	110000	16500 [ 110000*15% ]	93500 [ 110000-16500 ]
Operating expense	143000	27170 [ 143000*19% ]	115830 [ 143000-27170 ]
Total	253000	43670	209330

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	234800	0	-234800
Costs :
Variable cost of goods sold	93500	0	93500
Variable operating expenses	115830	0	115830
Fixed costs	43670	43670	0
Income (loss)	-18200	-43670	-25470

b.

Should Star Cola be retained ?

Answer : Yes

As indicated by the differential analysis in part (A), the net income would decrease by $25470 if the product is discontinued.