Question

Differential Analysis for a Discontinued Product A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year: Sales $237,800 Cast of goods sold 111,000 Gross profit $126,800 Operating expenses 142,000 Loss from operations $(15,200) It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs and that 18% 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 "O". Use a minus sign to indicate a loss. Differential Analysis Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2) January 21 Differential Effect Continue King Discontinue King on Income Cola (Alternative 1) Cola (Alternative 2) (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 if the product is discontinued. Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 39% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $28 Direct labor 20 Factory overhead (39% of direct labor) 7.8 Total cost per unit $55.8 If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 16% of the direct labor costs. a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "O". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) February 24 Make Carrying Buy Carrying Differential Effect Case (Alternative 1) Case (Alternative 2) on Income (Alternative 2) Sales Price Costs: Purchase price $ Direct materials per unit Direct labor per unit Variable factory overhead per unit Fixed factory overhead per unit Income (Loss) b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision