Differential AnalysisReport 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 $236,300

Cost of goods sold (111,000)

Gross profit$125,300

Operating expenses (143,000)

Operating loss $(17,700)

It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 20% 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.

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

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

Differential revenue from annual sales of Royal Cola:

1.Choose Below. $___________________

a. Cost of goods sold

b. Gross profit

c. Net profit

d. Operating expenses

e. Revenue from sales

Differential cost of annual sales of Royal Cola:

2.Choose Below. __________________

a. Fixed cost of goods sold

b. Gross profit

c. Net profit

d. Revenue from sales

e. Variable cost of goods sold

3.Choose Below ________________ ___________________

a. Fixed operating expenses

b. Gross profit

c. Net profit

d. Variable operating expenses

e. Variable overhead expenses

4.Choose Below $____________________

a. Annual differential income from sales of Royal Cola

b.Annual differential loss from sales of Royal Cola

c. Gross profit

d. Net profit

e. Variable operating expenses

5.Choose Below.

a.It should be discontinued because the company would increase total company income by $24,220.

b.It should be discontinued since short-term profitability will improve.

c.It should be retained because discontinuing it has no effect on variable costs.

d.It should be retained because total income for the company will decrease by the excess of differential revenue over differential cost if the product is discontinued.