Question
Differential Analysis for a Discontinued Product A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the
Differential Analysis for a Discontinued Product
A condensed income statement by product line for Healthy Beverage Inc. indicated the following for Fruit Cola for the past year:
Sales | $232,100 |
Cost of goods sold | 108,000 |
Gross profit | $124,100 |
Operating expenses | 145,000 |
Loss from operations | $(20,900) |
It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Because Fruit 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 January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate a loss.
Differential Analysis | |||
Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2) | |||
January 5 | |||
Continue Fruit Cola (Alternative 1) | Discontinue Fruit 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 Fruit Cola be retained?
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