A condensed income statement by product line for Canadian Beverage Inc. indicate

Question

A condensed income statement by product line for Canadian Beverage Inc. indicated the following for Lemon Mist for the past year:

Sales $362.000
Cost of goods sold 185,000
Gross profit $177,000
Operating expenses 215,000
Loss of operations $(38,000)
It is estimated that 23% of the cost of goods sold represents fixed factory overhead costs and that 27% of the operating expenses are fixed. Since Lemon Mist is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

How to prepare a differential analysis report, dated January 3, 2008, for the proposed discontinuance of Lemon Mist.
*show illustrations*

Explanation / Answer

We can show the differential Analysis report as under Including Lemon Mist Excluding Lemon Mist Sales 362000 Nil Cost of goods sold 185000 42550 Gross Profit/ (loss) 177000 (42550) Operating Expenses 215000 58050 Loss from Operations (38000) (100600) Its is better to continue the Lemon Mist product as it will lead to a higher loss of $100600 than $38000. The differential cost is $62600. Hope this is useful

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