A condensed income statement by product line for Nordic Beverage Inc. indicated the following for Diet Kola for the past year:
Sales ............. $486,000
Cost of goods sold ......... 258,000
Gross profit ........... $228,000
Operating expenses ........ 260,000
Loss from operations ........ $ (32,000)
It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Since Diet Kola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
a. Prepare a differential analysis report, dated January 3, 2006, for the proposed discontinuance of Diet Kola.
b. Should Diet Kola be retained? Explain.