Differential Analysis for a Discontinued Product
A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year:
Sales | $233,500 |
Cost of goods sold | 112,000 |
Gross profit | $121,500 |
Operating expenses | 144,000 |
Loss from operations | $(22,500) |
It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Since Royal 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, 2014, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0".
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Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) | |
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| | Continue Royal Cola (Alternative 1) | | | Discontinue Royal Cola (Alternative 2) | | | Differential Effect on Income (Alternative 2) | |
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Variable cost of goods sold | | | | | | | |
Variable operating expenses | | | | | | | |
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b. Should Royal Cola be retained?