Differential Analysis Report for a Discontinued Product

A condensed income statement by product line for Garcia Beverages Inc. indicated the following for Melon Cola for the past year:

Sales	$3,750,000
Cost of goods sold	(2,250,000)
Gross profit	$1,500,000
Operating expenses	(1,800,000)
Operating loss	$(300,000)

It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 35% of the operating expenses are fixed. Since Melon Cola is only one of many products, the fixed costs will not be significantly affected if the product is discontinued.

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

GARCIA BEVERAGES INC.
Proposal to Discontinue Melon Cola
Differential Analysis Report
Differential revenue from annual sales of Melon Cola:
Revenue from sales		$
Differential cost of annual sales of Melon Cola:
Variable cost of goods sold	$
Variable operating expenses
Annual differential income from sales of Melon Cola		$