Differential Analysis for a Discontinued Product A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year: Sales $232,600 Cost of goods sold 111,000 Gross profit $121,600 Operating expenses 144,000 Loss from operations $(22,400) It is estimated that 14% of the cost of goods sold represents fixed factory overhead costs and that 22% 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, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss. Differential Analysis Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) January 21 Continue Royal Discontinue Royal Differential Effect Cola (Alternative 1) Cola (Alternative 2) on Income (Alternative 2) Revenues 232,600 -232,600 Costs: Variable cost of goods sold 95,460 95.460 Variable operating expenses Fixed costs 47,220 Income (Loss) $296,680 X $-47,220 - 249,460 x 112.130 Feedback Check My Work For continue and discontinue alternatives subtract the costs from the revenue. Use percentages to separate variable from fixed costs, Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1. b. Should Star Cola be retained? Explain. Yes As indicated by the differential analysis in part (A), the income would decrease by the product is discontinued