1.

Differential Analysis for a Discontinued Product

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

Line Item Description	Amount
Sales	$235,000
Cost of goods sold	(111,000)
Gross profit	$124,000
Operating expenses	(143,000)
Operating loss	$(19,000)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Because Vim Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

Question Content Area

a. Prepare a differential analysis dated November 2 to determine whether Vim Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis Continue (Alt. 1) or Discontinue (Alt. 2) Vim Cola November 2

Line Item Description	Continue Vim Cola (Alternative 1)	Discontinue Vim Cola (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$Revenues	$Revenues	$Revenues
Costs:
Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
Variable operating expenses	Variable operating expenses	Variable operating expenses	Variable operating expenses
Fixed costs	Fixed costs	Fixed costs	Fixed costs
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)