Differential Analysis Report 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	$236,800
Cost of goods sold	(109,000)
Gross profit	$127,800
Operating expenses	(142,000)
Operating loss	$(14,200)

It is estimated that 12% 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 significantly affected if the product is discontinued.

Question Content Area

a. Prepare a differential analysis report for the proposed discontinuance of Royal Cola.

British Beverage Inc. Proposal to Discontinue Royal Cola Differential Analysis Report

Differential revenue from annual sales of Royal Cola:
Cost of goods soldGross profitNet profitOperating expensesRevenue from salesRevenue from sales		$Revenue from sales
Differential cost of annual sales of Royal Cola:
Fixed cost of goods soldGross profitNet profitRevenue from salesVariable cost of goods soldVariable cost of goods sold	$Variable cost of goods sold
Fixed operating expensesGross profitNet profitVariable operating expensesVariable overhead expensesVariable operating expenses	Variable operating expenses	Variable operating expenses
Annual differential income from sales of Royal ColaAnnual differential loss from sales of Royal ColaGross profitNet profitVariable operating expensesAnnual differential income from sales of Royal Cola		$Annual differential income from sales of Royal Cola

Question Content Area

b. Should Royal Cola be retained?

Yes.No.Yes.