Instructions

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

Sales	$395,100
Cost of goods sold	182,700
Gross profit	$212,400
Operating expenses	256,900
Loss from operations	$ (44,500)

It is estimated that 21% of the cost of goods sold represents fixed factory overhead costs and that 27% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

	Required:
A.	Prepare a differential analysis, dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B.	Should Star Cola be retained? Explain.

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Fixed costs
Gain on sale of investments
Income (loss)
Loss on sale of investments
Revenues
Variable cost of goods sold
Variable operating expenses

A. Prepare a differential analysis, dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Score: 7/89

Differential Analysis

Continue Star Cola (Alternative 1) or Discontinue Star Cola (Alternative 2)

January 21

1		Continue Star Cola	Discontinue Star Cola	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8

Points:

0.08 / 1

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 1 from alternative 2.

B. Should Star Cola be retained? Explain.

Yes

No

Points:

1 / 1

As indicated by the differential analysis in part (A), the income woulddecrease by

if the product is discontinued.