A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year: Sales $234,200 Cost of goods sold 112,000 Gross profit $122,200 Operating expenses 144,000 Loss from operations $(21,800) 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 Royal 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 Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss. Differential Analysis Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2) January 21 Continue Royal Cola (Alternative 1) Discontinue Royal Cola (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $fill in the blank d867d5011051f9d_1 $fill in the blank d867d5011051f9d_2 $fill in the blank d867d5011051f9d_3 Costs: Variable cost of goods sold fill in the blank d867d5011051f9d_4 fill in the blank d867d5011051f9d_5 fill in the blank d867d5011051f9d_6 Variable operating expenses fill in the blank d867d5011051f9d_7 fill in the blank d867d5011051f9d_8 fill in the blank d867d5011051f9d_9 Fixed costs fill in the blank d867d5011051f9d_10 fill in the blank d867d5011051f9d_11 fill in the blank d867d5011051f9d_12 Income (Loss) $fill in the blank d867d5011051f9d_13 $fill in the blank d867d5011051f9d_14 $fill in the blank d867d5011051f9d_15 b. Should Star Cola be retained? Explain. As indicated by the differential analysis in part (A), the income would by $BLANK if the product is discontinued.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 3E: Differential analysis for a discontinued product A condensed income statement by product line for...

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Differential Analysis for a Discontinued Product

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

Sales	$234,200
Cost of goods sold	112,000
Gross profit	$122,200
Operating expenses	144,000
Loss from operations	$(21,800)

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 Royal 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 Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
	Continue Royal Cola (Alternative 1)	Discontinue Royal Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$fill in the blank d867d5011051f9d_1	$fill in the blank d867d5011051f9d_2	$fill in the blank d867d5011051f9d_3
Costs:
Variable cost of goods sold	fill in the blank d867d5011051f9d_4	fill in the blank d867d5011051f9d_5	fill in the blank d867d5011051f9d_6
Variable operating expenses	fill in the blank d867d5011051f9d_7	fill in the blank d867d5011051f9d_8	fill in the blank d867d5011051f9d_9
Fixed costs	fill in the blank d867d5011051f9d_10	fill in the blank d867d5011051f9d_11	fill in the blank d867d5011051f9d_12
Income (Loss)	$fill in the blank d867d5011051f9d_13	$fill in the blank d867d5011051f9d_14	$fill in the blank d867d5011051f9d_15

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would by $BLANK if the product is discontinued.

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