Differential Analysis for a Discontinued Product

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

Sales	$236,800
Cost of goods sold	111,000
Gross profit	$125,800
Operating expenses	142,000
Loss from operations	$(16,200)

It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King 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 King 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 King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
January 21
	Continue King Cola (Alternative 1)	Discontinue King 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 Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would by $ if the product is discontinued.