A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 255,000 Loss from operations $(49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star 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 21 to determine whether to Continue Star Cola (Alternative 1) or Discontinue Star Cola (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Continue Star Discontinue Star Differential Effects Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues 390,000 V Costs: Variable cost of goods sold 147,200 Variable operating expenses 178,500 Fixed costs Profit (loss) b. Should Star Cola be retained? Explain. Yes v As indicated by the differential analysis in part (a), the income would decrease v by $ X if the product is discontinued.
A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales $390,000 Cost of goods sold 184,000 Gross profit $206,000 Operating expenses 255,000 Loss from operations $(49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star 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 21 to determine whether to Continue Star Cola (Alternative 1) or Discontinue Star Cola (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Continue Star Discontinue Star Differential Effects Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues 390,000 V Costs: Variable cost of goods sold 147,200 Variable operating expenses 178,500 Fixed costs Profit (loss) b. Should Star Cola be retained? Explain. Yes v As indicated by the differential analysis in part (a), the income would decrease v by $ X 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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Transcribed Image Text:Differential Analysis for a Discontinued Product
A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year:
Sales
$390,000
Cost of goods sold
184,000
Gross profit
$206,000
Operating expenses
255,000
Loss from operations
$(49,000)
It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star 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 21 to determine whether to Continue Star Cola (Alternative 1) or Discontinue Star Cola (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which
you must enter subtracted or negative numbers use a minus sign.
Differential Analysis
Continue Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2)
January 21
Continue Star
Discontinue Star
Differential Effects
Cola (Alternative 1) Cola (Alternative 2)
(Alternative 2)
Revenues
$390,000
Costs:
Variable cost of goods sold
147,200
Variable operating expenses
178,500
Fixed costs
Profit (loss)
$
b. Should Star Cola be retained? Explain.
Yes v
As indicated by the differential analysis in part (a), the income would decrease v by $
X if the product is discontinued.
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