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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 materiall affected if the product is discontinued. a. Prepare a differential analysis dated January 21 to determine whether Star 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 Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Differential Effect on Income Continue Star Discontinue Star Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback Check My Work b. Should Star Cola be retained? Explain. Yes v by $ if the product is discontinued. As indicated by the differential analysis in part (A), the income would decrease v

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 materiall affected if the product is discontinued. a. Prepare a differential analysis dated January 21 to determine whether Star 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 Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Differential Effect on Income Continue Star Discontinue Star Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback Check My Work b. Should Star Cola be retained? Explain. Yes v by $ if the product is discontinued. As indicated by the differential analysis in part (A), the income would decrease v

Managerial Accounting
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 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 Star 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 Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Differential Effect Continue Star Discontinue Star on Income Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback Check My Work b. Should Star Cola be retained? Explain. Yes bý $ if the product is discontinued. As indicated by the differential analysis in part (A), the income would decrease v
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 Star 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 Star Cola (Alt. 1) or Discontinue Star Cola (Alt. 2) January 21 Differential Effect Continue Star Discontinue Star on Income Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) Feedback Check My Work b. Should Star Cola be retained? Explain. Yes bý $ if the product is discontinued. As indicated by the differential analysis in part (A), the income would decrease v
Decision to Discontinue a Product On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children's Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? Foremost Footwear Inc. Product-Line Income Statement For the Year Ended April 30, 20Y7 Children's Men's Women's Total Shoes Shoes Shoes Sales $165,000 $300,000 $500,000 $965,000 Costs of goods sold: Variable costs $105,000 $150,000 $220,000 $475,000 Fixed costs 32,000 60,000 120,000 212,000 Total cost of goods sold $137,000 $210,000 $340,000 $687,000 Gross profit $28,000 $90,000 $160,000 $278,000 Selling and adminstrative expenses: Variable selling and admin. $45,000 $95,000 $161,000 $21,000 expenses Fixed selling and admin. 17,000 20,000 25,000 62,000 expenses Total selling and admin. $38,000 $65,000 $120,000 $223,000 expenses $(10,000) $25,000 $40,000 55,000 Income (loss) from operations would decrease v by $ If the Children Shoe's are discontinued, the company's income
Transcribed Image Text:Decision to Discontinue a Product On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children's Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? Foremost Footwear Inc. Product-Line Income Statement For the Year Ended April 30, 20Y7 Children's Men's Women's Total Shoes Shoes Shoes Sales $165,000 $300,000 $500,000 $965,000 Costs of goods sold: Variable costs $105,000 $150,000 $220,000 $475,000 Fixed costs 32,000 60,000 120,000 212,000 Total cost of goods sold $137,000 $210,000 $340,000 $687,000 Gross profit $28,000 $90,000 $160,000 $278,000 Selling and adminstrative expenses: Variable selling and admin. $45,000 $95,000 $161,000 $21,000 expenses Fixed selling and admin. 17,000 20,000 25,000 62,000 expenses Total selling and admin. $38,000 $65,000 $120,000 $223,000 expenses $(10,000) $25,000 $40,000 55,000 Income (loss) from operations would decrease v by $ If the Children Shoe's are discontinued, the company's income
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