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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 55,000
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).

b.    Should Star Cola be retained? Explain.

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company CB as on January 21.

Explanation

The differential analysis of income from both alternatives is shown below.

Differential Analysis for Company CB
Continue (Alt. 1) or Discontinue (Alt. 2), Product SC
January 21
Continue
Product SC  (Alternative 1)
Discontinue
Product SC  (Alternative 2)
Differential effect on income
Revenues $390,000 $0 (-)  $390,000
Costs
   Variable Cost of goods (1) (-)�...

b)

To determine

To Advise: Whether the production of Product SC should be retained.

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