1. A condensed income statement by product line for Warrick Beverage Inc. indicated the following for Mango Cola for the past year:

Sales $ 15,000,000

Cost of goods sold (10,800,000)

Gross profit $ 4,200,000

Operating expenses (8,000,000)

Operating loss $ (3,800,000)

It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Because Mango 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 February 29 to determine whether Mango Cola should be continued (Alternative 1) or discontinued (Alternative 2).

b.Should Mango Cola be retained? Explain

2.Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $24 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials $ 8.00

Direct labor 12.00

Factory overhead (40% of direct labor) 4.80

Total cost per unit $24.80

If Somerset Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 25% of the direct labor costs.

a.On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.