A condensed income statement by product line for Celestial Beverage Inc. indicat

Question

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

sales 290,000

Cost of goods sold 155,000

Gross profit 135,000

operating expense 207,000

loss from operations (72,000)

It is estimated that 15 % of the cost of goods sold represents fixed factory overhead costs and that 25% of the operating expenses are fixed. Since Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

Prepare a differential analysis, dated January 21, 2014, to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2).

Should Star Cola be retained? Explain.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Star Cola should not be retained as it will reduce the Net Loss to 3000 as against 72000 when the product is retained.

Differential Analysis Continue King Cola (Alternative 1) Discontinue King Cola (Alternative 2) Differential Effect Revenues 290000 0 -290000 Costs Variable Cost of Goods Sold (155000*85%) -131750 0 131750 Variable Operating Expenses (207000*75%) -155250 0 155250 Fixed Costs (155000*15% + 207000*25%) -75000 -75000 0 Income (Loss) -72000 -75000 -3000

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