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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Differential analysis report for a discontinued product
A condensed income statement by product line for Garcia Beverages Inc. indicated the following for Melon Cola for the past year:

It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 35% of the operating expenses are fixed. Since Melon Cola is only one of many products, the fixed costs will not be significantly affected if the product is discontinued.
a.Prepare a differential analysis report for the proposed discontinuance of Melon Cola.
b.Should Melon Cola be retained? Explain.

To determine

Concept Introduction:

Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.

Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.

Two basic types of the relevant costs are as follows:

  1. Out-of-pocket costs
  2. Opportunity costs

Requirement-a:

To Prepare:

The differential analysis report for the proposed discontinuation

Explanation

The differential analysis report for the proposed discontinuation is prepared as follows:

    Loss of sales $ (3,750,000)
    Saving in Variable Cost of Goods Sold (2250000*80%)
To determine

Concept Introduction:

Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.

Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.

Two basic types of the relevant costs are as follows:

  1. Out-of-pocket costs
  2. Opportunity costs

Requirement-b:

To Indicate:

If the product should be retained

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