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Differential Analysis for a Discontinued Product A condensed income statement by product line...

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Accounting

  1. Differential Analysis for a Discontinued Product

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

    Sales $233,800
    Cost of goods sold 109,000
    Gross profit $124,800
    Operating expenses 146,000
    Loss from operations $(21,200)

    It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Because Fruit 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 January 5 to determine whether Fruit Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate a loss.

    Differential Analysis
    Continue Fruit Cola (Alt. 1) or Discontinue Fruit Cola (Alt. 2)
    January 5
    Continue Fruit Cola (Alternative 1) Discontinue Fruit Cola (Alternative 2) Differential Effect on Income (Alternative 2)
    Revenues $ $ $
    Costs:
    Variable cost of goods sold
    Variable operating expenses
    Fixed costs
    Income (Loss) $ $ $

    b. Should Fruit Cola be retained?

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