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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

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".

Differential Analysis

Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)

March 3, 2014

Continue Royal Cola (Alternative 1)

Discontinue Royal 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 Royal Cola be retained?

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